Subsidy is not bad after all!

Subsidy is a globally accepted economy-paying cushioning concept. It is the responsibility of every government to make the provision of goods and services available to its citizens, especially public and quasi-public goods. It ranges from health to education, transportation, energy, etcetera.

When the government makes certain payments on behalf of its citizens, especially for a good considered private, we say that good is being subsidised. It could also be in the form of financing, such as soft loans with low interest rates to individuals or incentives to businesses to produce certain goods that could induce positive externality and stabilise the economy. It should also be noted that transfers to households are not considered subsidies since they neither involve the sale of goods or services nor alter the price.

Read also: Understanding the real impact of subsidies: A call for targeted government support

What every country subsidises differs, as it’s mostly based on the needs of the citizens and the financial prowess of the government. For instance, during the outbreak of the coronavirus pandemic, global activities were abruptly halted, and businesses were shut down except for those who were providing essential services. During this period, the United Kingdom government created a job retention scheme through Furlough. The scheme provided grants to employers so they could retain and continue to pay staff during the global coronavirus lockdown.

In a bid to cushion the debilitating effect of the coronavirus in the United States of America (USA), the Senate passed an unparalleled $2.2 trillion economic rescue package, steering aid to businesses, workers, and healthcare systems that were affected by the pandemic. Among many other things, the bill provided roughly $500 billion in guaranteed subsidised loans to larger industries, one-time direct payments to Americans of $1200 per adult, and $2400 to married couples, with $500 payments per child.

According to last year’s report, the German government was expected to end price subsidies for electricity and gas in March 2024. This subsidy was introduced during the energy crisis to shield consumers from excessive financial burdens during the winter. The above are a few instances where governments have provided subsidies to their citizens.

Fuel subsidies in Nigeria have been perceived as an avenue to help the rich instead of the poor. According to several pieces of literature, it is the rich who unevenly benefit from Nigeria’s fuel subsidy, as richer households consume larger quantities of PMS than the poor. However, the life of an average Nigerian depends on fuel to power small generators, for public transport, and for transferring agricultural produce from farms to the market.

It was disheartening to listen to a former vice presidential candidate in 2019 say that Nigeria’s budget priorities are misplaced. According to him, FG spent about N340 billion on health and N400 billion on education, which are crucial for development, yet the country allocated nearly a trillion naira to fuel subsidies. This expenditure is seen as wasteful because it doesn’t address the basic drivers of economic growth. He further mentioned that Nigeria has an estimated 2 million cars, that is, 10 per 1000 people, and 87 million people are living in poverty. He concluded that the fuel subsidy disproportionately benefits a small segment of the population and asked for it to be suspended.

So, invariably, it is wasteful to continue to pay for fuel subsidies, but many other things can be subsidised. I am not talking about the unproductive subsidy that our government is giving to the pilgrimages. That type of subsidy contributes almost nothing to our economy; it even represents leakage into the system.

It is the fiscal responsibility of the government to provide certain goods for the citizens. We have seen the government roll out food stamps to help low-income citizens cover the costs of their food. Chinese farmers are one of the strongest in the world of international trade because of the production subsidies they enjoy from the Chinese government. Even in the USA, agricultural production is one of the sectors that benefits from government subsidies. It was reported last year that the US government spends more than $30 billion a year on subsidies for farm businesses and agriculture. It is not as if we don’t have similar schemes in Nigeria, but many of them are not well coordinated, and sometimes those who really deserve the production subsidy don’t usually get it.

Subsidy has been so controversial in Nigeria because the government has refused to understand the teeming needs of the citizens. The country is divided into six geo-political zones, but their needs are not the same. Not everyone is benefiting from petroleum subsidies.

A man living in the North East might not need a house subsidy, but a man living in Lagos might. While some residents in the North East, North West, and North Central may be clamouring for subsidies on farm inputs, Lagosians and those who live in Abuja could be calling for housing and transportation ubsidies. The needs of each region are different, so the government must tailor subsidies to the needs of groups of people, professions, tribes, and regions.

Oluwole Crowther, Economist, Researcher and Data Analyst From Lagos, Nigeria.