Why fuel subsidy in Nigeria must end

Nigeria is the largest producer of petroleum products on the entire African continent and one of the largest in the world. Petroleum contributes over 90% of the federal government’s revenue and makes up a significant part of its GDP. Coincidentally, the country doubles as Africa’s largest economy and is considered a powerhouse on the African continent.

The 16th Nigerian President, Bola Ahmed Tinubu, was sworn in on 29th May 2023; in his inauguration speech, the President identified that the fuel subsidy would be completely removed by the government. This declaration sent shock waves across the country with petroleum marketers having concerns over the loss of revenues, fueling stations lacked the product, with significant hikes on the price of crude across the country. 

This article offers insight as to why fuel subsidies must be removed in Nigeria.

Understanding fuel subsidies

Fuel subsidies are governmental palliatives to cushion the effect of the rising cost of oil. It acts as a form of government intending to pull down the general price of refined crude oil through the provision of support and palliatives to oil retailing companies for the final product to be marketed to consumers at the subsidized price.

Over the years, fuel subsidies is a topic which has been hotly debated in Nigerian politics. The advancement of fuel subsidies by the government has made Nigeria the 8th country selling the cheapest petrol in the world and the cheapest on the African continent at $0.40 per litre. This figure has led many to dispute the subject of subsidies in the Nigerian economy. Nonetheless, many believe that the federal government has adopted fuel subsidies to mitigate the impact of the rising cost of crude in the lives of Nigerians. This is more when the country was announced to have over 60% of its population living in poverty and over 90% of the country depending on fuel for mobility, trade, power and others.

Today, about 65% of Nigerians agree that fuel subsidies must be removed, however, it must be done gradually so as not to affect the economy. The system of subsidy removal has over the years been shown to be dishonest, corrupt, and damaging to Nigeria’s long-term economic progress and her assurance of remaining the global powerhouse on the African continent. 

Why fuel subsidies should be removed

Having understood how fuel subsidies work, we delve into how the policy aims to reduce relevancy in business for Nigeria. In 2023, the Nigerian National Petroleum Corporation Ltd (NNPC Ltd) announced that it made 0% profits for 2022, the NNPC Ltd laid the blame on the existence of fuel subsidies. According to NNPC Ltd, over 199 billion Naira were spent on fuel subsidies. Other reasons why fuel subsidies must be removed are provided below:

1. Economic burden

The significant pressure put on Nigeria’s economy by fuel subsidies is overwhelming. The government spends billions of Naira on fuel subsidies, for instance, in the 2023 budget, the federal government budgeted over 3 trillion Naira for financing fuel subsidies, an amount which is greater than the budget for education and health care put together.

The burden of fuel subsidies may be shifted to other relevant sectors such as infrastructure development, educational advancement, health care delivery, social welfare and other programme aimed at improving the general well-being of Nigerians. 

Following billions of Naira spent on subsidies every year, it would be most efficient to shift the attention of the use of these resources to activities that would better drive economic growth, reduce poverty and improve Nigeria’s overall standard of living.

2. Corruption and inefficiency

Corruption and inefficient public service have been the norm in Nigeria since independence. The government has struggled to keep up with some of the basic service offerings to the people with most of the biggest shortfalls witnessed by Nigerians. The management of fuel subsidies has not been left by this plague of inefficiency and widespread corruption. 

One such inefficiency and corruption is the constant and continued claim that subsidized fuels from Nigeria make it to the Ghanaian, Cote D’Ivoire, Cameroon and other West African markets, with a significant presence in central Africa. These subsidized fuels from Nigeria are then sold at higher prices to these West and Central African nations, thereby, causing significant losses to the country. This action not only reduces the nation’s resources but aids a culture of corruption and nepotism. 

3. Boosting private sector investment

Fuel subsidy removal would aid the confidence and continuous investment by the private sector into the petroleum industry. The removal of fuel subsidies offers a favourable environment for the private sector with increased opportunities for infrastructure development. 

The confusion surrounding fuel subsidies scares both domestic and foreign investors from investing in the market, this is because of fears relating to concerns on the potential risks and financial ramifications relating to subsidies. The removal of subsidies offers a strong environment and investment climate that attracts capital for varying sectors such as agriculture, manufacturing, infrastructure and others for the upliftment of the nation’s economy and job creation.

4. Fiscal responsibility and budget optimization

Fuel subsidies have had a significant influence on Nigeria’s budget, causing fiscal deficits and increased borrowing. These deficits limit the government’s ability to invest in critical sectors, maintain infrastructure, and provide crucial services to its citizens.

The government will be able to deploy cash to development initiatives, reduce borrowing, and create a more sustainable fiscal framework that supports long-term prosperity and stability by eliminating fuel subsidies.

Conclusion

Fuel subsidies in Nigeria are a major source of concern for the country’s economy, environment, and social well-being. Removing fuel subsidies will increase the country’s long-term economic potential, boost private sector investment, optimize budget allocation, promote cleaner energy sources, and improve social fairness.

Yet, to mitigate the short-term impact on vulnerable members of society, the transition must be handled carefully. The Nigerian government must accept other possibilities such as a targeted social welfare programme and investment in renewable energy sources to ensure a prosperous and sustainable future for all Nigerians. The abolition of petrol subsidies is a significant step towards economic progress, fiscal responsibility, and social advancement.