REMOVING THE PETROL SUBSIDY
Olubunmi Onafuwa and Michael Harrison argue that it is painful but inevitable policy
The fuel subsidy in Nigeria dates back to the 1970’s and took its present form in 1977. The original idea was to protect Nigerians from rising oil prices on international markets by setting a retail price cap with the difference coming from the federal government. The cost peaked at N4.4 trillion in 2022 prompting the government, to consider deregulation of petrol prices in a similar way to the deregulation of diesel in 2003. Expectations indicate oil prices will rise in the near future, this is very much a double-edged sword for Nigerian motorists and business owners, as they will now be exposed to market prices and find their wallets hotwired directly to international oil prices
Research undertaken by PWC Nigeria illustrates the extent to which supporting the fuel subsidy has siphoned resources away from other key areas such as education, health, and infrastructure. In the past nine years the federal government has invested N4390 trillion into the fuel subsidy compared to just N3530 trillion into education, health, and infrastructure combined. This is double edged, as the federal government is now free from the rising subsidy obligation and able to use its revenue in support of other goals and no longer finds itself looking to cut costs when oil prices rise. This is in line with the United Nations Sustainable Development Goals (SDG) 9, that encourages developing economies like Nigeria to build a functioning and resilient infrastructure through sustainable technologies and industry.
Initial evidence suggests that petrol consumption has dropped by 28% since the removal of the subsidy. This is a massive decrease considering how much people rely upon driving, but reflects the, so far, price rise of N172 per litre. The impact on individuals is bold, with much protest as envisaged however, the benefits outweigh the drawbacks; long term. Yet, the impact on small businesses should not be overlooked too quickly. Rapidly rising prices pose a significant cost increase to small businesses (registered or otherwise). Those who choose not to go bust will only have the option to raise prices and pass the burden onto consumers.
The president, Bola Tinubu in one of many announcements, stated that he understands that households and businesses are struggling but the removal was crucial to boost the economy. Hence, the government has promised to intervene to relieve the impact. Much has been said on what the money would be spent on e.g., N5 billion palliative (part grant and part loan) for each state of the federationhttps://www.premiumtimesng.com/news/headlines/616579-subsidy-removal-nigerian-govt-approves-n5bn-for-each-state-fct.html. However, nothing has been actioned.https://www.reuters.com/world/africa/nigeria-saved-132-bln-two-months-after-fuel-subsidy-removal-tinubu-2023-07-31/.
Funds accumulated from the removal of the petrol subsidy would be better utilised to improve the ailing public service facilities in Nigeria as an immediate action. For instance, in 2020, the Minister of Health Dr Osagie Ehanire recommended a health care system that protected every Nigerian from financial hardship at the point of accessing health services. He acknowledged the potential implementation challenges but stressed that it was attainable.
This would require a total overhaul of the health care system, and its finances to improve accessibility to care and medicine. With the majority of the population registered through the National Identification Number (NIN) scheme and Bank verification Number system (BVN), this could be more achievable than expected. By ensuring that services e.g., welfare is made available and are allocated to the right people. Noting that SDG 3 requires states to ensure healthy living standards and promote wellbeing for all citizens. In addition, Article 13(2) of the Banjul Charter reiterates the right of every citizen to government funded facilities. This would be a turning point in the restructuring of the entire public and social welfare system in Nigeria and ensuring that citizens benefit directly from the financial gain.
Evidence suggests the federal government may be keen to hold prices at their current level in order to prevent prices rising too quickly and to meet protesters in the middle. The economics of this is not strong; the whole rational for dropping the fuel subsidy is to disconnect the federal government’s budget from international oil prices, any backtrack would re-establish this connection. However, many do see a need to provide financial relief, given the price rise was so rapid and rising tensions in Iraq and the wider Middle East may stir up uncertainty about future oil prices.
We believe alternative approaches can be considered to soften the blow. Firstly, it may be possible to drop the 7.5% VAT tax of fuel, or at least support businesses which are already registered to pay tax, to claim the fuel duty back.
All in all, this will be a painful policy in the short term, however this a key step in re-invigorating the federal government’s ability to support the development of the country. It is perhaps difficult to see the long term benefits when the short term inconvenience is so prominent, especially as people overvalue present costs and undervalue future gains.
Dr Onafuwa is Senior Lecturer in Law, University of East London while Dr Harrison is Senior Lecturer in Economics and Finance in the same university
