From shock to stability: Learning from Indonesia’s fuel subsidy phase-out

The end to fuel subsidies, which had long artificially kept petrol prices low, has sparked a series of economic and social hardships. This shock therapy effect is still unabated, affecting all, especially the vulnerable.

To navigate this complex transition, Nigeria might benefit from studying Indonesia’s experience—a nation that successfully managed a similar shift and reaped substantial rewards.

Indonesia’s approach to removing fuel subsidies provides a compelling case study for Nigeria. The South Asian nation, home to over 250 million people, grappled with its own subsidy dilemma for decades.

After several failed attempts in 1998, Indonesia finally began dismantling most of its gasoline and diesel subsidies in 2015. This decision was made not as a sudden shock but through a phased approach designed to mitigate immediate negative impacts on its citizens.

“In contrast, Nigeria’s abrupt subsidy removal in May 2023 has been met with significant challenges; the immediate effect was a dramatic tripling of fuel prices, which exacerbated inflationary pressures and deteriorated living conditions for many Nigerians.”

Adeola Adenikinju, president of the Nigerian Economic Society (NES), highlighted the efficacy of Indonesia’s strategy at the 65th annual NES conference in Abuja.

Read also: Tinubu’s petrol subsidy gulps N15trn as scarcity worsens

According to Adenikinju, Indonesia’s method of gradual subsidy removal, coupled with targeted social safety nets, managed to cushion the blow to the poorest segments of society. This approach helped stabilise social conditions despite initial unrest and price increases.

The World Bank reports that Indonesia’s GDP, which stood at $860.9 billion in 2015, has surged to $1.37 trillion in less than a decade. The multilateral lender projects that Indonesia’s GDP will continue to grow at an average annual rate of 5.1 percent from 2024 to 2026.

This impressive growth underscores the success of Indonesia’s energy reforms, which not only improved economic stability but also bolstered infrastructure resilience and energy availability.

In contrast, Nigeria’s abrupt subsidy removal in May 2023 has been met with significant challenges; the immediate effect was a dramatic tripling of fuel prices, which exacerbated inflationary pressures and deteriorated living conditions for many Nigerians.

The country’s economic transition, while aiming to replicate Indonesia’s success, has so far faced hurdles in ensuring energy security and managing price volatility.

The situation in Nigeria reveals the complexities involved in balancing economic reforms with social stability. As Adenikinju points out, Nigeria’s subsidy removal has led to significant concerns about energy affordability and volatility.

These issues highlight the need for a carefully managed approach to such reforms, with an emphasis on creating mechanisms that protect the most vulnerable.

Read also: Lessons for Nigeria on how Indonesia phased out fuel subsidy

Indonesia’s successful energy reform experience provides valuable lessons for Nigeria. Key factors in Indonesia’s success included a robust domestic refining value chain, essential infrastructure for transportation and logistics, and well-designed complementary policies to mitigate the short-term social costs of subsidy removal.

For Nigeria, adopting a similar phased approach could help ease the transition and prevent economic shocks.

To emulate Indonesia’s success, Nigeria must address several critical areas. Investments in infrastructure are crucial to support a stable energy supply and efficient distribution network.

Additionally, the government needs to establish targeted social safety nets to protect low-income households from the adverse effects of price increases. Complementary policies should be developed to cushion the immediate impacts and guide the economy through this period of adjustment.

In conclusion, Nigeria’s path to economic stability and growth requires a nuanced and strategic approach to fuel subsidy reform. By drawing on the lessons from Indonesia’s experience, Nigeria can better navigate the complexities of this transition.

The goal is not only to achieve economic diversification and sustainability but also to ensure that the benefits of these reforms are equitably distributed. As Nigeria moves forward, adopting a well-rounded and phased approach to reform, supported by targeted policies and infrastructure improvements, will be key to achieving long-term economic success and stability.