Fuel subsidy removal in Nigeria: To be or not to be

The fact that oil revenue still dominates the federation account does not imply that the oil and gas sector is performing excellently well.

It is even disheartening that a sector that continues to play a dominant role in sustaining the nation’s economy cannot boast of a single refinery which has consequently increased the level of expenditure on crude oil processing as Nigeria still depends on foreign countries to get its crude oil refined.

This has consequently made no positive impact on the nation’s economy as Nigeria has kept on losing billions of dollars year in year out. On the basis of this loss, the IMF suggested that since none of its local refineries are functional, the only way to recover from this loss is for the government to put a stop to fuel subsidy.

This implies that the cost of producing and distributing petroleum products would no longer be borne by the Nigerian government but by the masses. Thereafter, the government announced its plan to fully remove subsidy by 2022 and revealed that fuel price may sell for N340.

A lot of reactions have been generated in this regard and different schools of thought have aired their views.

The proponents for fuel subsidy removal argue that it has become eminent to remove fuel subsidy as the government needs to spend the revenue generated from crude oil on other meaningful projects. For instance, the federal ministry of finance and budget office revealed that between 2006 and 2018, Nigeria lost N9.84 trillion on subsidy payments.

In the same vein, another proponent argues that the fact that Nigeria cannot boast of making substantial growth despite the recent surge in crude oil price is enough evidence that it is high time Nigeria stopped subsidizing its petroleum products.

For instance, the IMF recently speculated that even though Nigeria’s revenue has grown as a result of the increased price of crude oil at the global level, Nigeria might not be able to save much due to higher security spending and increased public debts. Also, the IMF revealed that fiscal deficits are projected to stay above the pre-pandemic levels with public debts rising to 43 percent in 2026, except a drastic measure is taken.

In a contrary opinion, however, another school of thought believes that removing fuel subsidy does not automatically mean Nigeria will become better off, especially considering the fact that the country is yet to fully recover from the economic shock of the COVID-19 pandemic which threw the economy off balance as the GDP witnessed a growth decline of 6.1 percent by the second quarter of 2020.

Since then, the nation’s economy is just getting off its feet, therefore; employing a contractionary fiscal tool like subsidy removal for a country that is currently witnessing both socio-economic and political downturn might not be in the best interest of its citizens.

Another submitted argument is that there is no point for government to remove fuel subsidy while its refineries still remain moribund and corruption still remains at large, therefore, the government should seek another means of generating revenue by considering cutting down the cost of governance alongside economic restructuring.

Cash-based incentive vs subsidy: Issues arising

In the year 2021, the Nigerian government proposed a Cash-Based Intervention (CBI) scheme to cushion the effect of fuel subsidy removal.

However, Nigerians have identified many reasons why the proposed subsidy removal and the cash-based intervention might not be a good move.

Cash-based interventions have not always worked in Nigeria. For instance, a scheme called tradermoni was introduced in the year 2015. This involves giving traders N15, 000 to lift them out of poverty but this approach didn’t achieve its purpose as Nigeria continues to be the poverty capital of the world.

Therefore, distributing N5000 to 40 million citizens of Nigeria cannot be a short-run or solution long-run solution, especially going by the level of inflation and poverty ravaging the country.

Also, which technique would the government employ to disburse the money? It is no longer news that the issue of corruption and embezzlement of funds remains a big issue in Nigeria.

It is, therefore, left for the government to answer the question of how the fund will be disbursed such that the reason for its disbursement is not defeated by corruption.

Furthermore, if the government intends to disburse the funds for a year, what happens in the subsequent years to come, considering the fact that most times, government policies are usually not sustainable in Nigeria?

Read also: The PIA has made an end to fuel subsidy irresistible – Ngelale

Finally, the Nigerian government has to be more realistic in its intended approach. If they are to pay 5000 to 40 million Nigerians every month, this implies that the government will need a total amount of N200 billion per month and running into trillions of naira yearly. This is a huge sum of money which breeds another question of where the government intends to get the funding from.

If the plan is to get the money from the proceeds of subsidy then that means that the reason for its removal would never be achieved as the government would not be able to save for more pressing needs.

Given the level of inflation that will likely occur, N5000 is way far below the minimum wage in Nigeria. It is, therefore, not sufficient to address the consequence of fuel subsidy removal.

The Nigerian government, therefore, needs to look inwards beyond its proposed cash-based incentive which appears to be a mission dead on arrival.

Beyond subsidy removal and the proposed CBI, a more pragmatic and sustainable solution is the only way forward. Rehabilitating the four major refineries in the country would be a major landmark achievement for the current administration as it will save the nation from further socioeconomic and political collapse.

Subsidy removal: A means to an end or an end in itself?

Nine years after the removal of fuel subsidy by the previous administration, poverty has continued to be on the high side as a research report of the World Bank revealed that over 45 percent of the Nigerian populace will live in extreme poverty by the year 2022 thereby defeating the narrative that fuel subsidy removal will bridge the gap between the poor and the rich in Nigeria. Also, a report by the “Borgen Project” revealed that “unemployment has skyrocketed as one-third of the population does not have a job while food inflation which has accounted for 70 percent of Nigeria’s inflation has also continued to compound Nigeria’s hunger and poverty crisis”.

Also, the inflation rate in Nigeria was 12.22 percent in the year 2012 from 10.3 percent as of December 2011 which signified a 2.2 percent increase in inflation. While in the year 2021, the inflation rate stood at an average of 16 percent which means that it might not be entirely wrong to attribute fuel subsidy removal to increased inflation.

The issue of fuel subsidy removal has remained a public discourse in Nigeria in recent times as the federal government appears ready to finally remove fuel subsidy in the year 2022, following the recommendations by the IMF that running the Nigerian economy can no longer be business as usual as Nigerians need to come to the terms that the government can no longer afford to spend its savings hugely on subsidy at the expense of other pressing needs.

If the government is keen on removing fuel subsidy, there are different issues it needs to address. Firstly, removing fuel subsidy without revitalizing the nation’s refineries will be pointless as the government would still continue to import refined petroleum products.

In addition, effective measures will have to be carried out to mitigate the effects on the poor and vulnerable people beyond the disbursement of cash. Also, efforts should be made to curtail the deliberate diversion of revenues generated as a result of a corrupt system.

Also, Industrialization remains an important strategy for ensuring economic sustainability. In this case, the government should embrace the grassroot approach to development. This approach will be more effective if the government can ensure that each local government has a particular industry depending on the type of natural resource and labour resources that exists in each area.