• Friday, December 08, 2023
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Removing fuel subsidies: Costs, benefits, and next steps

Removing fuel subsidies: Costs, benefits, and next steps

On Monday, May 29, 2023, Nigerians got what seems like a harsh taste of economic reality after President Bola Ahmed Tinubu emphatically declared in his inauguration speech that “fuel subsidy is gone.”

While the original text of the presidential address was that the notorious fuel subsidy policy was a drain on Nigeria’s drying revenues and that the new presidential administration would continue with the previous administration’s plan of phasing out the petrol subsidy regime by June 2023, many marketers of Premium Motor Spirit (PMS) in Nigeria immediately expressed their disapproval at the President’s decisiveness by reflecting the retail petrol pump price upwards — up to about ₦600. In less than two hours after President Tinubu’s announcement. By the day after, fuel queues resurfaced in several cities across Nigeria.

Fuel subsidy in Nigeria is a direct or indirect payment made by the government to private firms or individuals to offset the costs of importing Premium Motor Spirit (or petroleum) into Nigeria. In 2021, the Nigerian government, through the Nigerian National Petroleum Corporation (NNPC), spent ₦1.77 trillion on fuel subsidies, a 477% increase from the ₦307 billion it spent on fuel subsidies in 2015.

In 2022, the NNPC spent ₦4.39 trillion on fuel subsidies, that’s over 24% of Nigeria’s total expenditure. Meanwhile, the nation’s spending on capital projects for the 2022 financial year was only ₦4.95 trillion. Imagine that.

It’s important to be transparent with the use of the saved funds and redirect it into critical supply chain infrastructure investments

Through the NNPC’s Direct Sale Direct Purchase (DSDP) arrangement, NNPC sells refined crude oil products to select local and international oil marketing companies in exchange for refined petroleum products.

It then sells the exchanged petroleum products at a “flat fee” to Nigerian oil marketers, so Nigerians can buy petrol at a uniform price. While the fuel subsidy program, in theory, is a laudable economic incentive for stabilizing the economy, economic observers in Nigeria all agree that the subsidy practice has become an economic albatross for the nation.

It has been estimated that the cost of fuel subsidies in 2022 will eclipse the Federal Government of Nigeria’s spending on education, healthcare, and other social security provisions.

The World Bank confirms that to maintain fuel subsidies in Nigeria, the country will have to increase its borrowing, raise additional revenue elsewhere or reduce spending on other public goods and services, thereby hindering economic growth and weakening Nigeria’s fiscal accounts. Furthermore, a report by PwC notes that 40% of the income distribution in Nigeria accounts for less than 3% of all fuel purchases in Nigeria. It adds that private firms, public transportation services, government agencies, and other business entities consume three-quarters of all fuel sold in Nigeria. Despite these, it is appalling that a substantial share of subsidized petrol is smuggled out of Nigeria for resale in neighbouring countries.

In light of the discrepancies of fuel subsidy in Nigeria, it is applaudable that President Bola Tinubu has taking a decisive stand on the issue. However, it’s important to be transparent with the use of the saved funds and redirect it into critical supply chain infrastructure investments.

If Tinubu’s administration can invest in healthcare, education, and infrastructure, Nigeria can offset its huge subsidy budget and put in place far-reaching social investment schemes that cut across all strata of Nigerian society, as opposed to the nebulous implementation of the fuel subsidy program that primarily benefited only a select few members of the Nigerian business class. In the post-fuel subsidy regime, these are the critical supply chain areas that the Nigerian government must endeavour to channel its resources towards:

1. Investing in healthcare and education:

In 2023, Nigeria allocated ₦1.17 trillion to the health sector; the amount comprised ₦404.08 billion for capital expenditure and ₦580.2 billion for recurrent expenditure. However, humongous as Nigeria’s health budget may seem, the sum makes up only 5.75% of Nigeria’s total budget for the 2023 financial year, far below the 15% budgetary healthcare commitment recommended by the African Union (AU).

I believe for, Nigeria to take advantage of the summative potentials of its teeming populace if the health conditions of Nigerians are intact. If we invest in improving the public healthcare and institutions and education in Nigeria, we will have a society of learned and healthy people. By arming Nigeria’s health industry with the financial armory it needs, the country can avoid untoward situations like the massive brain drain currently experienced in the health sector, thereby reducing the abysmal doctor-patient ratio of one doctor to 10,000 Nigerians. Proper capitalization of the healthcare sector will also help to improve healthcare facilities in Nigeria, which reduce the prevalent culture of medical tourism and the exit of scarce foreign exchange earnings to well-developed medical institutions abroad.

2. Fixing transport infrastructure:

According to the World Bank, Nigeria has only about 160,000 km of state and rural roads. The Infrastructure Concession Regulatory Commission (ICRC) also maintains that 135,000 km of road networks in Nigeria are untarred. During the last administration, the government estimated it needs $1.5 trillion to fix Nigeria’s road infrastructure deficit over the next ten years. If we don’t have good roads, it is counterintuitive that we are subsidizing fuel.

As an economic analyst succinctly put it, “a country that does not subsidize food but gives farmers loans cannot sustain subsidies on petrol.” Likewise, a country with shabby roads across the length and breadth of its hemisphere cannot sustain subsidies on petrol.

Read also: Petrol subsidy removal will boost Nigeria’s sovereign wealth fund -NSIA

The Federal Government of Nigeria, in its post-subsidy regime, must place a priority on the development of Nigerian road infrastructure. It is only by doing so that we can sustainably attain economic growth in Nigeria. Since all strata of the Nigerian economic cadre employ Nigerian roads in conducting their economic affairs, especially as it relates to trade activities. Thereby supporting the free flow of goods and people.


The effectual removal of fuel subsidies in Nigeria is not the final masterstroke in ending supply chain disruptions in Nigeria, occasioned by poor infrastructural investments. It is only just the beginning. However, the government must now channel its fuel subsidy reinvestment into other critical areas like education, agriculture, healthcare, and road infrastructure.

If we maintain consistent investment in the crucial infrastructures supporting trade in Nigeria for the next ten years, we will be on the path to improving the wellbeing of the people and lifting many Nigerians out of poverty.