Economics, Featured, History, Opinion

An Essential Trade-Off  – Understanding The Move To Eliminate Fuel Subsidies In Nigeria

Nmesoma Okwudili


September 4, 2023

During his inauguration on May 29th, Nigerian President Bola Ahmed Tinubu declared the comprehensive elimination of the “fuel subsidy,” contending that the program has progressively exhibited a proclivity towards benefiting the affluent at the expense of the underprivileged. He further asserted that the subsidy can no longer rationalise its escalating expenses in light of depleting resources.

Fuel subsidies have been a contentious and ongoing issue in many countries, Nigeria not being an exception. The Nigerian government has enforced fuel subsidies. for decades in an effort to stabilise fuel prices and lessen the burden on the country’s citizens’ finances. However, debates and discussions have started both locally and internationally as a result of concerns about the system’s effectiveness, potential negative effects, and workable alternatives.

“We shall instead re-channel the funds into better investment in public infrastructure, education, health care and jobs that will materially improve the lives of millions,” He said

Paradoxically, Nigeria, a significant oil producer, has trouble giving its people access to affordable fuel. The economy of the country is primarily dependent on oil revenue, yet the erratic nature of the world oil market makes domestic fuel pricing difficult. In order to combat this and avoid public unrest brought on by sudden price changes, the Nigerian government implemented fuel subsidies.

Since the 1970s, fuel subsidies have been a common practice in Nigeria. In order to lessen the negative effects of rising international oil prices on the Nigerian population, the government has consistently sold gasoline to its residents at prices below the cost of production.

Fuel subsidies became the norm after the Price Control Act was passed in 1977, making it illegal to sell certain goods—including gasoline—above the set price. With the intention of easing the effects of the global “Great Inflation” period during the 1970s, which was sparked by a global increase in energy prices, this act was introduced by the Olusegun Obasanjo military administration.

Fuel subsidies in Nigeria have been dogged by inefficiencies and disputes despite their intended benefits. The misuse of resources is one of the main issues. Subsidies can cause market distortions, encourage gasoline smuggling, and cause fuel to be diverted to neighbouring nations with higher fuel costs, causing significant losses for the Nigerian government.

Furthermore, given their greater rates of car ownership and fuel use, these subsidies show a lopsided distribution in favour of the richer sectors of the population. On the other hand, those with lower earnings, who frequently lack access to private transportation, benefit from these subsidy arrangements to a lesser extent. This discrepancy raises legitimate questions about the fairness and objectivity of such policy measures.

When then-President Goodluck Jonathan announced its elimination in January 2012, the idea of subsidies sprang to national prominence. This action caused the price of fuel to rise from 65 naira ($0.14) to 140 Naira ($0.30) per litre, which in turn sparked the nearly two-week-long #OccupyNigeria movement.

The issue primarily arises from Nigeria’s inadequate refining capacity, resulting in the country exporting crude oil only to later repurchase refined products. Fuel subsidies place a substantial fiscal strain on the Nigerian government. The resources allocated to these subsidies could be redirected to sectors like education, healthcare, and infrastructure development, generating more widespread benefits for the populace. Moreover, these subsidies exacerbate fiscal disparities and constrain the government’s potential to invest in efforts aimed at reducing the economy’s reliance on oil.

Fuel costs have tripled in Nigeria as a result of Tinubu’s announcement, adding to the difficulties already faced by the population, which is now dealing with 20% inflation, sporadic petrol shortages, and ongoing power outages.

However, critics claim that the government’s efforts to lessen the effects on the most vulnerable groups in society are still insufficient. The World Bank and IMF both advocated the termination of subsidies as a necessary step for advancing development in Africa’s most populous country.

Nevertheless, a more prudent strategy might have entailed the government opting to introduce the subsidy removal in a phased manner. This gradual implementation would have enabled citizens and businesses to acclimate to the revised pricing framework, potentially alleviating the initial strain on households while affording the economy the necessary period to accommodate the transition

The removal of fuel subsidies in Nigeria is likely to result in both short-term difficulties and long-term benefits. While the initial consequences may include increased fuel costs, inflation, and the possibility of societal upheaval, the elimination could also facilitate improved government fiscal health, the encouragement of investments in renewable energy avenues, and the development of a more streamlined market environment. The effectiveness of such a policy shift is dependent on competent administration, which includes actions to support vulnerable people throughout the transition and smart allocations in sectors capable of accelerating long-term economic growth.


Imperative of fuel subsidy removal in Nigeria

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