THE IMPERATIVE OF FUEL SUBSIDY REMOVAL

Petrol subsidies are unsustainable and exacerbate Nigeria’s fiscal woes, argue Gbenga Falana and Emmanuel Ojo

Since the advent of democracy in 1999, Nigeria, the continent’s second-largest oil producer after Angola, has been embroiled in a controversy over its fuel subsidy regime. This policy, which was initially implemented as a six-month measure to stabilise petroleum prices during the rehabilitation of local refineries, has persisted for decades despite a brief removal. The subsidies have been a double-edged weapon, providing many citizens with relief while also nurturing corruption and economic stagnation.

Historically, Nigerians have viewed fuel subsidies as one of the few benefits they received from the state, particularly given the absence of a constant and stable electricity supply in the country. Without the subsidy, the price of petrol would consume a substantial portion of a citizen’s daily budget, forcing many to rely significantly on petrol generators. Nonetheless, these subsidies have been a source of economic duress, costing the Nigerian treasury an estimated $10 billion per year by 2022.

There has been criticism of the subsidy system. After subsidies were eliminated in 2012, petrol prices skyrocketed, resulting in widespread protests and strikes. In response, the government reduced the cost of fuel by 30 percent, but this was merely a band-aid for an ongoing problem. In 2016, as global oil prices plummeted, subsidies were once again eliminated, citing the unsustainable nature of the practise and the pervasive corruption in subsidy payments.

However, despite these turbulent events, the case for eliminating petroleum subsidies remains compelling. They are fiscally unsustainable and exacerbate Nigeria’s fiscal woes, a concern shared by the World Bank. These subsidies promote overconsumption, divert resources from more productive sectors, worsen pollution and global warming, and aggravate inequality by benefitting wealthier households that consume more fuel.

Under the new administration of President Bola Ahmed Tinubu, who assumed office on May 29, 2023, the need to eliminate subsidies has become more urgent. The previous administration had delayed the subsidy removal deadline of June 2023. However, President Tinubu appears determined to end the subsidy system, which raises concerns about rising fuel and transport costs, which could lead to an increase in the working poor.

Nevertheless, the potential advantages of subsidy removal substantially outweigh the present challenges. The billions saved could be invested in education, technology, infrastructure development, and agricultural input subsidies for producers. Such investments could yield a far greater return for Nigeria than the current wasteful expenditures on a petroleum subsidy system rife with corruption.

Removing the petroleum subsidy could also strengthen Nigeria’s Conditional Cash Transfers programme, which was introduced in 2016 as part of the Social Investment Programme. This could potentially mitigate the immediate negative effects of subsidy removal on Nigerians with poor incomes.

A national awareness campaign is essential for gaining public understanding and support for the elimination of petroleum subsidies. This programme should transparently communicate the rationale for the removal, the potential economic gains, and the government’s strategy to alleviate the immediate hardships faced by the poor and vulnerable, thereby helping to anticipate the type of backlash and protests observed during previous attempts to remove subsidies.

The key to gaining the public’s trust is for the government to be transparent and accountable for the money saved by removing subsidies. The government must assure Nigerians that the end of subsidies is not merely a matter of policy. This is a necessary step towards a more sustainable and prosperous future. This can be accomplished by demonstrating that the funds previously allocated to petroleum subsidies are now invested in directly beneficial public goods and services such as healthcare, education, and infrastructure.

In addition, the government should collaborate with multiple stakeholders, such as labour unions and civil society organisations. These organisations exert considerable influence over public opinion, and their endorsement of subsidy elimination could significantly contribute to its adoption by the public. In addition, the administration of President Tinubu ought to emphasise oil sector reform to increase local production and reduce Nigeria’s reliance on imported refined petroleum. This could contribute to the long-term stability of petroleum prices, mitigating the economic impact of the subsidy elimination. The recent opening of Dangote Refinery, the world’s largest single-train refinery, is a promising development, although it may not have an immediate impact on prices. Additionally, the government should consider implementing social protection measures to mitigate the impact of the subsidy elimination on the vulnerable. These may include cash transfers, essential goods and services subsidies, and job creation initiatives.

In conclusion, the removal of fuel subsidies in Nigeria is an urgent and crucial move towards economic sustainability and prosperity. However, it must be managed through a holistic approach that includes public awareness campaign, stakeholder engagement, sector reform, and social protection initiatives. Nigeria has a unique opportunity under the stewardship of President Bola Ahmed Tinubu to free itself from the economic burden of the fuel subsidy regime and embark on a path towards a brighter and more prosperous future.

Falana is a Fiscal Expert currently involved in the West African Tax Transition Support Programme (PATF). He holds the position of Managing Partner at MTouch Professional Services in Nigeria while Ojo is a researcher with a C rating from South Africa’s National Research Foundation (NRF) at the University of the Witwatersrand, Johannesburg, South Africa. He holds the position of Faculty Chair for Transformation, Internationalisation, and Partnerships in the Faculty of Humanities at the same university.

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