Fuel Subsidy Regime: Matters Arising. Part-1

Read the following engaging article on fuel subsidies in Nigeria. This is part one, authored by an anonymous writer. Enjoy!

“Fuel subsidy is gone” That was a statement by the Nigerian President,  Asiwaju Bola Ahmed Tinubu  at his inauguration as the President of the Federal Republic of Nigeria on the 29th May 2023 which changed the whole narrative in the socio economic development of the Nigerian people. He was sworn in at exactly 10:37am on May 29th 2023 before former Nigerian leaders, African leaders and delegates from different parts of the world. Earlier that morning, I was at a fuel station that morning to purchase N3000 worth of fuel at the rate of N197 and things seems to be going on well. The story changed following the announcement of the removal of fuel subsidy by the newly inaugurated Nigerian leader as I returned to the same fuel station by 11; 15am and discovered that the price had changed from N197 to N500 in a space of 3 hours. The price of fuel has continued to increase since then and has reached an all time pick of N950 in the middle of August and even N1000 depending on the location while relief is not yet in sight for Nigerians. This is an increase of over 382 % which in turn has a multiplier effect on the prices of goods and services in Nigeria.  But how did Nigeria get to this situation?

Origin of fuel subsidy in Nigeria

The fuel subsidy in Nigeria has not only a long history but also a complex one with so many controversies over the years. Here is a brief overview:

1. Introduction of fuel subsidy. Fuel subsidy was first introduced in Nigeria in the 1970’s as a way to cushion the impact of rising fuel prices on the Nigerian population. It was geared towards keeping prices low for the consumption of Nigerians
2. Growth of subsidy costs. The cost of subsidizing fuel in Nigeria grew significantly as a result of factors like corruption, inefficiency and mismanagement. This actually led to the Nigerian government spending millions of dollars each year in fuel subsidy
3. Attempted removal of fuel subsidy. Earlier in January 2012, the then Nigerian leader, Dr. Goodluck Ebele Jonathan attempted to remove fuel subsidy which led to wide spread protest across the country, strikes by various labor unions, destruction of lives and properties etc. That removal of subsidy was aimed at reduction of the burden of subsidy on public finance and addressing corruption associated with fuel subsidy. Following the protest nationwide, the government was forced to reintroduce subsidy partially.
4. Subsidy reforms. The Nigerian government over the years has introduced various reforms which included fuel price modulation mechanism that adjusted fuel prices based on international crude oil prices. Despite those reforms, fuel subsidy has continued to be contentious issues with allegations of corruption, smuggling of those subsidized products to the neighboring countries like Niger Republic, Chad etc.

Perceived corruption in subsidy regime

Corruption in the fuel subsidy system has been a significant issue for many years, leading to massive financial losses, inefficiencies and mismanagement. Here are perceived traces of corruption associated with fuel subsidy.

–              Overinflated subsidy payments. This seems to be the most common form of corruption in the subsidy saga which implies inflating the quantity of fuel imported into the Nigerian territory. The situation is made worse following the inability of the Nigerian National Petroleum Corporation to provide accurate data of quantity of premium motor spirit (PMS) consumed in Nigeria per day which could assist in tracking the weekly, monthly and yearly consumption of petrol in Nigeria.

–              Round tripping and smuggling. This involves importing fuel at subsidized prices and re –exporting it to higher price to neighboring countries at higher prices thereby making profits from the price difference. Again, such would not have been possible if the consumption rate in the Nigerian territory is known.

–              Fake importation claims. Some companies involved in the fuel importation and subsidy have taken advantage of the lacuna in the system to defraud the Nigerian government. They are found of making fake importation claims and submitting those claims so as to rip the system.

–              Lack of transparency and accountability. There are instances where subsidy payments are made to companies without proper verification of their claims leading to financial losses on the side of the government.

Subsidy removal and the Nigerian economy:

Its been fifteen months now (May 29th 2023 to August 2024) that the epoch making speech by the newly inaugurated Nigerian leader was made and the impact being felt across the entire nation. In this piece, we shall be looking at impact on the Nigerian economy. However, if the subsidy removal is properly managed, it can have both positive and negative implications. Here are some positive effects of subsidy removal:

1. Fiscal savings. Removing fuel subsidies can lead to significant fiscal savings for the Nigerian government but what these savings can be utilized becomes a different thing all together. The proponents of fuel subsidy removal assured the Nigerian people that much were going to be saved following the bold step taken by the Nigerian leader which could be used to fund critical infrastructures in the entire nation. This is because subsidies are a major drain on government finances and removing them can free up resources that can be redirected to other priority areas such as health care, education, etc. Recent data shows that between May 2023 and August 2024, the Nigerian government may have saved almost N1.45 trillion ( $1.843 billion) . These savings reflect the significant financial impact of fuel subsidy removal and provision in Nigeria.
2. Efficient resource allocation. Shortly after announcement of subsidy removal, the proponents made strong case for its support, arguing that with the removal, market forces can play a greater role in determining fuel prices across the country. According to them, efficient resource allocation could be achieved as prices reflect the true cost of production and consumption which automatically reduces wasteful consumption. The question yet to be answered is “has efficient allocation achieved for the past fifteen months since till date the Nigerian National Petroleum Company cannot even provide any available statistics of the quantity of petrol motor spirit (PMS) that is consumed on the daily basis which can assist in knowing the PMS need of the country in a year?
3. Investment in alternative energy sources: Another argument presented to Nigerians following the removal of subsidy was that once subsidy is gone as announced, the higher price of PMS would be temporary. According to them, higher prices can make alternative energy sources more competitive, leading to a shift towards cleaner and more sustainable energy sources. Generally, government seems to have taken some steps to invest in alternative energy removal with some initiatives such as: renewable energy projects which includes investments in solar, wind and hydroelectric power. They have also invested in energy efficiency programs which involve initiatives to improve energy efficiency in industries, buildings and transportation. Nigerian government according to source seems to have partnered with international organizations and development agencies to support the development of alternative energy sources. These partnership provide funding, technical expertise and capacity building to accelerate transition to clean energy.

Generally, the removal of fuel subsidy in Nigeria has positive impacts on the Nigerian economy, government finances as well as the energy sector. What about the negative impact of such fuel subsidy removal and transition to renewal energy on the economy? What can the Nigerian government do to save its economy from an imminent collapse? The next article ….