Fueling the Laggard: Nigeria's Petrol Subsidy

 

The petrol subsidy regime has long been a contentious topic in Nigeria, with proponents arguing that it alleviates the burden of high fuel prices on consumers, while critics contend that it imposes a heavy economic cost on the country and is a cesspit of corruption. On May 29, 2023, whilst giving his inaugural speech, President Bola Ahmed Tinubu declared that the petrol subsidy regime in Nigeria was to be discontinued immediately. Whilst it may not have come as a great surprise to many, given that his predecessor had not budgeted for it, his public declaration cemented the position that indeed, the subsidy had finally ended. This article aims to delve into the topic of petrol subsidy in Nigeria, examining the impact on government finances, economic growth & investment, and potential future impact.

Petrol subsidies in Nigeria refer to the government's policy of selling petrol at prices below the cost of production and importation, with the intention of making fuel more affordable for consumers. The Nigerian National Petroleum Corporation (NNPC) is primarily responsible for the importation and distribution of petroleum products, including petrol.

The History of Fuel Subsidies

The history of fuel subsidies in Nigeria dates back several decades. Here is a brief overview:

1973-1986:

• Following the oil price shock of 1973, the Nigerian government introduced subsidies to stabilize domestic fuel prices and ease the burden on consumers.
• Subsidies were initially intended as a temporary measure but became deeply ingrained in Nigeria's petroleum pricing system.

1986-1999:

• In response to economic challenges, the Nigerian government, under the Military rule of General IBB, began implementing structural adjustment programs recommended by international financial institutions.
• As part of these reforms, fuel subsidies were significantly reduced, leading to a spike in fuel prices and public unrest. This period saw sporadic protests against rising fuel costs. Remember SAP must go?!

1999-2003:

• With the return of civilian rule under President Obasanjo, the government reintroduced fuel subsidies to address public dissatisfaction with high fuel prices.
• Subsidies were aimed at providing relief for consumers and stimulating economic growth.

2003-2011:

• During this period, Nigeria experienced a significant increase in crude oil prices on the global market, leading to substantial revenue inflows for the government.
• The government's ability to sustain petrol subsidies was bolstered by the oil boom, allowing them to keep fuel prices artificially low.

Subsidy removal protests

2012-2015:

• The sustainability of petrol subsidies came into question as fiscal pressures mounted. Nigeria faced budgetary constraints and rising subsidy costs.
• The Goodluck Jonathan government attempted to partially remove subsidies and introduced a petroleum pricing framework in 2012. However, it sparked nationwide protests and was fraught with implementation challenges.

2016-2022:

• In May 2016, the Buhari government officially announced the removal of fuel subsidies, citing fiscal realities and the need to redirect resources towards critical sectors.
• The removal of subsidies led to a significant increase in fuel prices, which led to civil unrest and debates over the impact on the cost of living. It was later reinstated and every year since then has been a constant "will it, won't it?" removal situation.

Fiscal Burden

Nigeria's fiscal situation has been strained for a number of years due to factors such as revenue shortages caused by increased oil theft and lack of economic diversification, poor infrastructure, high cost of government, insecurity challenges, and rampant corruption. This situation is exacerbated when the government subsidizes fuel and creates a significant fiscal burden in several ways:

Increased Expenditure: Subsidizing fuel requires the government to allocate a substantial portion of its already strained budget towards covering the price differential between the cost of importing or producing fuel and the artificially low retail price. This results in increased government expenditure on subsidies, which directly affects the fiscal balance. Nigeria has spent a total of N14.5 trillion ($33.7 billion approx.) on fuel subsidies between 2005 and 2021!

Revenue Shortfall: Fuel subsidies lead to a revenue shortfall for the government. The difference between the cost of importing or producing fuel and the retail price is not fully recovered through subsidies. Imported fuel that is subsidized by government is often diverted to neighbouring countries and sold at triple the price. As a result, the government misses out on potential revenue that could have been collected through fuel sales at market prices. This revenue shortfall adds to the fiscal burden, exacerbating budget deficits.

Budget Deficits: The high cost of fuel subsidies contributes to budget deficits in Nigeria. When the government spends more on subsidies than it can generate through revenue, it creates a budget deficit, requiring additional borrowing or drawing from existing reserves. Budget deficits can strain the overall fiscal health of the country, potentially leading to increased public debt and reduced fiscal space for other important expenditures.

Opportunity Cost: The financial resources allocated to fuel subsidies could be utilized more effectively in other areas of the economy. Instead of directing funds towards subsidies, the government could invest in critical sectors such as education, healthcare, infrastructure, or social welfare programs. Fuel subsidies divert resources away from these priority areas, limiting the government's ability to address pressing socio-economic challenges and stifling long-term economic growth.

Oil Price Volatility: Nigeria is heavily reliant on oil, and the cost of fuel subsidies is highly sensitive to fluctuations in global oil prices. When oil prices rise, the cost of importing or producing fuel increases, putting additional strain on the government's budget. This susceptibility to oil price volatility can create significant fiscal challenges and hinder the government's ability to effectively manage its finances.

Economic Growth & Investment

The Nigerian economy could be considered a laggard given its potential and title as Africa's largest economy by GDP. Yet for decades, it maintained a fuel subsidy regime that has limited its ability to grow. Although it must be acknowledged that government had made several attempts in the past to remove subsidies to the chagrin of the Nigerian masses.

"According to the forecast by the IMF published in its World Economic Outlook, Nigeria’s economy is set to expand by 3 percent in 2023, lagging behind Senegal (8.1 percent), the Democratic Republic of Congo (6.7 percent), Côte d’Ivoire (6.5 percent), Uganda (5.9 percent), and Ethiopia (5.3 percent)." ~ https://businessday.ng/business-economy/article/nigeria-lags-five-fastest-growing-african-economies/

Petrol subsidies have diverted funds from crucial sectors, affected policy making and crowded out private investment, which has inhibited economic growth. Typically, fiscal policy can help in stimulating growth through government expenditure during economic downturns. In Nigeria, economic activity is heavily reliant on government. When oil prices are high, government has money to spend and it trickles down into other parts of the economy. However, when prices are low, there are limited resources available for investment in critical areas and the government's ability to stimulate economic growth is hindered.

Monetary policy has also been affected by maintaining the subsidy. As mentioned in previous articles, the CBN has maintained a high interest rate environment (despite its limited effect on inflation) as a way of mopping up system liquidity to lend to the cash-strapped government. The effects of this is reduced availability of credit and financial resources in the economy, which should ordinarily be channeled to the private sector to help businesses grow.

Nigeria reportedly has an infrastructure deficit of about $3 trillion over the next 30 years. This has stifled the business environment and aided in crippling the Micro, Small and Medium Enterprise (MSME) sector, which is the lifeblood of any free market economy. This infrastructure gap could have potentially been significantly narrowed if spending on subsidies had been directed at infrastructure development.

Subsidies have discouraged private investment in the downstream sector, which encompasses refining, distribution, and marketing of petroleum products. This has resulted in limited refining capacity, leading to a heavy reliance on fuel importation and putting excessive pressure on the country's delicate foreign reserves. However, Alhaji Aliko Dangote and his mega refinery will hopefully put an end to that... Dangote, Dangote still dey find money o!

Subsidy gone, What next?

Despite the bold statement made by the new President on the removal of subsidy, the jury is still out on how long this stance will hold. After all, subsidy has been removed in the past but was reinstated after periods of civil unrest. The current economic situation in the country, with high levels of inflation, unemployment and poverty, creates a potential powder keg of socioeconomic challenges for the current administration to douse. Within barely a week of the President's declaration, petrol prices have skyrocketed by over 250 percent. This will undoubtedly have an effect on inflationary figures with prices of food, transportation and services expected to go even further northwards.

Nigeria secured a $800 million relief package from the world bank as a palliative for the subsidy removal. The current Minister of Finance cited that the funds will be "disbursed to 10 million households as cash" and would also be used to develop a mass transit system. It remains to be seen whether this would be implemented as such, given the possibility that a new Finance Minister may be in place before the funds are disbursed. A cash disbursement would probably be the least effective palliative measure, due to the country's poor track record of welfare spending reaching its target recipients. Furthermore, one-off cash disbursement will barely cushion the effects of soaring inflation.

Without a social welfare system, the fuel subsidies have been the only piece of the proverbial "national cake" that the Nigerian at all socioeconomic levels, has felt entitled to. The subsidies have somewhat shielded Nigerians from the realities of global economic headwinds. It has allowed those in positions of power to continue "chopping" from what seems like an elixir of never-ending wealth, portraying the illusion that Nigeria is rich despite the rotting infrastructure and depressing socioeconomic backdrop. Those at the base of the pyramid have been cushioned from market realities that have touched every corner of the globe. All this has been to the detriment of the country's growth.

Oil and non-oil GDP growth

The new administration has a unique opportunity to steer Nigeria on the course of greatness. The previous administration focused on infrastructure development and economic diversification. It may not be obvious to Nigerians but the numbers show. This undoubtedly had an effect on liquidity and reduced consumption. This subsidy removal will be a more bitter pill to swallow but like a critically ill patient, the country needs to go through this shock therapy to rejig our collective mindsets to the global realities. However, it is critical that the leadership recognizes the pains of the Nigerian masses and ensures that the savings from subsidy removal is channeled towards poverty alleviation and economic development and not providing a bigger pot for the largesse of a few. We must not continue fueling the laggard.

Thanks for taking time out to read this article. Please feel free to send me a message or comment on the article. I am always happy to discuss other perspectives and explore different philosophies.