IMPACT OF FUEL SUBSIDY REMOVAL ON NIGERIAN ECONOMY

IMPACT OF FUEL SUBSIDY REMOVAL ON NIGERIAN ECONOMY

INTRODUCTION

A subsidy is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.

Fuel subsidy is payment made by the federal government to assist her citizens consume fuel at lower cost. When the cost is higher they can decide not to make payments. When this happens then it is called “subsidy removal” Subsidy may be made not only to consumers but also to producers. It may be in form of price guarantee to make the producers produce more food. Subsidy is often common, where it is given to producer of food to reduce food insecurity (FAO, 2012). There are so many different way to classify subsidy, labour subsidy, infrastructural subsidy, export subsidy, consumption subsidy, (Yemi, 2012). Much as subsidy is an economic necessity, who benefit from it? Is it the citizen or the government? This question is necessary because government continue to have more money at the expense of the citizens when there is subsidy removal, but if there is no subsidy removal, the citizen’s benefit. Government removal of subsidy is always hung on the premise that it will use the money realize to provide infrastructures. This has never been achieved. This culminated to the formation of Subsidy Reinvestment
Programme (SURE-P) to manage the funds accrued from the subsidy removal (Alwell, 2012) Despite the (SURE-P) intervention the people still did not see any benefit of subsidy removal. The cost of the fuel subsidy continues to expose the citizens to untold hard-ship due to rising cost of fuel as well as transportation which indirectly affect food prices.

REMOVAL OF FUEL SUBSIDY IN NIGERIA

The Federal Government of Nigeria in its efforts to deregulate the downstream oil sector completely decided to remove fuel subsidy on January 1st 2012, under the leadership of President Goodluck Jonathan. This was made real when the president of Nigeria decided not to make provision for subsidy payment in the 2012 appropriation bill (the budget). The president came up with a strong argument that the sum of 3.4 billion naira spent in subsidizing fuel went into fraudulent hands (Gyoh, 2012). The sum of 1.4 trillion Naira spent annually in subsidizing fuel, had slowed down economic growth. It was against this back drop that the government through the instrumentality of the Petroleum Product Price Regulatory Agency (PPPRA) announced the removal of fuel subsidy by 32 naira thereby moving the previous price of fuel from 65 naira to 97 naira per litre. This singular act brought about massive protest across Nigeria by labour unions and civil society groups to speak against this policy.

Government also insisted that subsidy removal will eliminate fuel smuggling across Nigeria boarder thereby eliminating scarcity in Nigeria. Although, in-spite of these benefits, the federal government was not unaware of the hardship that would accompany subsidy removal policy and as such promised some palliative measures to reduce the hardship.

The present government of the day, the APC government under the leadership of President Muhammed Buhari have succeeded in complete removal of fuel subsidy in Nigeria as there was no provision for fuel subsidy in the proposed 2016 budget.

The Negative Impact of Oil Subsidy Removal In Nigeria

Increased Cost Of Living In Nigeria

Gasoline, premium motor spirit (PMS) or fuel as it is normally called in Nigeria is the second most used product after food in Nigeria. Whenever the price of fuel goes up, the price of everything goes up. This is because transport cost for providing essential services goes up and it creates multiplier effect in the economy, the ripples are felt even up to the rural areas. No part of the economy functions in isolation, every part of the economy depends on the other for services. The movement of agricultural product from one place to another depends on the transport subsector, the tagging of price of agric transport cost; Removal of subsidy means increase in transport cost, increase in the cost of running business (Small scale business), and increase cost of production which generally translate into high cost of living in Nigeria.

Despite the unrest, the decision to abolish Nigeria’s fuel subsidy is the right one. In 2011 alone, Nigeria’s fuel subsidy cost the country an estimated $8 billion and the price tag for 2012 was expected to be even greater. This does not even take into account the country’s losses due to market distortions as a result of the subsidy.

While politically costly in the short run, if Nigeria’s government can implement transparent and well-structured reforms, the funds from the fuel subsidy program could be put to far greater use.

With an estimated 37.2 billion barrels of proven oil reserves, Nigeria is one of the world’s largest oil producers. However, the country’s mineral riches have not resulted in a significant improvement in the quality of life for the majority of Nigeria’s citizens, 54 percent of whom live below the national poverty line. In 2010, Nigeria earned $59 billion from oil exports. Therefore, Nigeria does not lack the resources to reach its development goals, rather its resources have been utilized inefficiently.

The Positives Impact of Oil Subsidy Removal In Nigeria

 

If fuel subsidy is removed in Nigeria, Natural monopoly (by the NNPC) will automatically be destroyed, giving room for private companies and thus competition. Just as it was in the days of NITEL (Nigerian Telecommunications), before the telecommunication sector was deregulated and the door was opened to private investors and thus a revolutionary good to the Nigerian economy. Just as it was then, when new companies flood in there will be an increase in price, SIM cards then were as high as N50, 000. In the face of competition, this dropped as low as N100. Same will be the case for oil, when the subsidy is removed, petrol may sell as high as N160 per litre, but when competition comes in it will drop to the barest minimum, possibly lower than N65 per litre.

The amount the Government pay on subsidy can be channeled to meeting social needs like free and quality health care and education for all. This is therefore a right step in the right direction, and is capable of helping Nigeria achieve her vision 202020.

It’s no news that the Nigerian oil sector loses 40% of her oil produce annually to the mis-managing hands of flaring. Flaring causes pollution and subsequently the depletion of the ozone layer. If the sector is deregulated and subsidy is removed, flaring will drop drastically as no company will want to lose that much.

When the price of petroleum product sky rockets within the first 6-12months after the removal of subsidy, Nigerians will look elsewhere for generation of Fuel. This will lead to the development of alternate power supply. This can help the solar energy sector thrive better. Also, it can help the coal industry find her foot in the Nigerian Market.

Retrenchment is inevitable in cases of deregulation on the short run, but on the long run employment opportunities will be nearly unlimited. A good example is that of telecommunications, when the sector was deregulated, the staff of NITEL lost their jobs in hundreds. But in no time, jobs were all over in MTN, GLO, ZAIN, ETISALAT, VISAFONE and about 16 other companies in thousands. The case will be identical for the downstream oil sector.

The recently launched GLO 1 cable had made indigenous telecommunication company, Globacom, capable of selling bandwidth to international companies. The same would be the case in the Petroleum industry if deregulated.

Removal of Fuel subsidy is a hard one to sell; this is due to the fact that we, the masses are not ready to look the other way on this issue. The removal of oil subsidy, if properly done has inexhaustible benefits. Removal of subsidy from black gold in Nigeria is an awful tasting medicine, but the Nigerian patient is in dire need of it.

CONCLUSION

A subsidy as discussed above is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction so fuel subsidy is the reduction in the cost of fuel per litre given by the Nigeria government to her citizens. The removal of this subsidy means that the fuel price per litre will go higher than usually which at the moment make will life more unbearable for Nigerian people as the price of almost everything will go up. But if properly handle over time the result of the subsidy removal and deregulation of the petroleum down stream will definitely have a greater positive side as this is believed to bring down the price as a result of competition, provision of employment opportunities, creation of more job opportunities as more jobs will be created if more private sectors are involved in refining and marketing of petroleum products. There will increase in provision of more social amenities and infrastructure as the government will use the money meant for subsidy on developmental project.

Finally I will conclude that the removal of fuel subsidy at the onset will have a harsh effect on Nigeria economy and its people but it will be a worthwhile adventure if properly hand as a result of its many positive benefits.

REFERENCES

Adegbulugbe, A.O and A. Adenikinju (2008), “Energizing Vision 2020”. Paper Presented at the 1st International Conference of NAEE/IAEE at the Transcorp Hilton Hotel, 29th – 30th

Afonne E., (2011), “Politics of Oil Subsidy: The Cartel‟s Fraudulent Acts” ,Nigerian Newsworld, October 24, 15(34).

Anderson, K. and McKibben, W.J. (1997). “Reducing Coal Subsidies and Trade Barriers: Their Contribution to Greenhouse Gas Abatement.” Seminar Paper 97-07. Centre for International Economic Studies, University of Adelaide: Adelaide, Australia.

Birol, F., Aleagha, A.V. and Ferrouki, R. (1995). “The economic impact of subsidy phase out in oil exporting developing countries: a case study of Algeria, Iran and Nigeria.” Energy Policy . 23(3):209-215.