Fuel subsidy, also known as petroleum subsidy, is a government policy that has been in place in Nigeria for several decades. It is the practice of the government paying for a part of the cost of imported petroleum products to help keep the cost of fuel low for consumers. 

The subsidy involves the government paying the difference between the landing cost of imported petroleum products and the price paid by consumers at the pump. 

The subsidy program in Nigeria was introduced to ensure that Nigerians have access to affordable fuel, especially after the deregulation of the downstream sector in 2003. 

The Nigerian government has always claimed that the subsidy program is necessary to cushion the impact of high oil prices on the local population. 

However, in recent years, the subsidy program has been plagued by corruption, inefficiency, and mismanagement. 

Unarguably, there have been reports of fraud, misappropriation of funds, and diversion of petroleum products meant for domestic consumption to neighbouring countries. 

The Nigerian National Petroleum Corporation (NNPC) has been accused of mismanaging the subsidy program, leading to annual budget overruns and a massive debt burden. 

Against this backdrop, the Nigerian government announced plans to remove fuel subsidies in 2022. The decision has been met with mixed reactions, with some applauding the move while others are opposing it. 

The Good and the Bad of Removing the Fuel Subsidy 

Amidst several eclectic reactions, some applaud the move while others agitate that the president should look into the plights of Nigerians before taking the decision. It is just fair that we look at some functional reasons for the subsidy removal. 

Why subsidy should be removed

Reduced Government Expenditure: Fuel subsidy removal will reduce the burden on the government’s finances since the government will no longer have to pay for the difference between the landing cost of imported petroleum products and the pump price. 

It’s been reported that the Nigerian government has spent over N16 trillion on fuel subsidies in the last 16 years. 

Again in 2022, the government expended $10 billion on fuel subsidies  (over 4.6 trillion naira). This is equivalent to 27.2% of Nigeria’s N17.1 trillion budget for 2022.

This will, in no small measure, boost other sectors such as health care, education, infrastructure development, etc. 

Promotion of Local Refining: The removal of fuel subsidy is likely to encourage the development of local refineries, which will create jobs and boost economic growth. By removing fuel subsidies, the government is signalling its intention to support the establishment of local refineries and encourage investment in the downstream sector. 

Although Nigeria, through the Nigerian National Petroleum Corporation (NNPC), owns four, barely functional refineries located in Kaduna, two in Port Harcourt, and one in Warri, Delta State,  with a combined capacity of 445,000 barrels per day, they have been plagued by problems for many years. 

In 2021, the refineries operated at an average of just 10% of their capacity. This has led to Nigeria becoming a net importer of refined petroleum products.

However, there is hope for Nigeria as the recently commissioned Dangote Refinery which is estimated to hold 37 billion barrels of proven oil reserves, Nigeria is the second biggest oil-rich country in Africa, after Libya.

The Dangote refinery will double Nigeria’s refining capacity and help meet the increasing domestic fuel demand while generating foreign exchange through exports.

Attraction of Foreign Investment: The removal of fuel subsidies is also likely to attract foreign investors interested in investing in Nigeria’s downstream sector. With a more transparent subsidy framework, foreign investors can have confidence in the sector and invest in building refineries, pipelines, and other infrastructure necessary for the efficient distribution of petroleum products. 

Increased Revenue to the State: With the fuel subsidy removed, the government can tax petroleum products at a higher rate, which will boost the state’s revenue. This additional revenue can be used to fund infrastructure projects, healthcare, and other social welfare programmes. 

The challenges that will come if Subsidy is Removed

The immediate effect of subsidy removal will be an increase in fuel prices, which will affect the cost of transportation and ultimately the price of goods and services. 

This rise in prices may trigger inflation, which will be detrimental to the purchasing power of the average Nigerian. 

The inflation rate as of 2023 stands at 22.04%, which means that the price of food has increased tremendously in the past years.

Unemployment: Fuel subsidy removal may lead to job loss because some of the people working in the sector may lose their jobs, especially those working in illegal fuel stations and refineries. 

Social Unrest: There is the possibility of social unrest, as observed in the January 2012 fuel subsidy removal protest, which attracted nationwide attention. 

Corruption: Removing the fuel subsidy may not automatically eliminate corruption in the sector. Some oil companies and individuals may be involved in price fixing, arbitrary increase of pump prices, and hoarding of petroleum products. 

Way Forward.

It is essential to note that subsidy removal is not a one-size-fits-all solution to Nigeria’s economic challenges. Therefore, to minimize the impact of subsidy removal on the Nigerian population, the government can consider adopting the following recommendations:

Government Intervention: The government must intervene in the downstream sector by establishing modular refineries, promoting the use of alternative energy sources, and providing incentives to encourage investors to invest in the industry. 

Price Regulation: Removing the subsidy does not automatically result in market efficiency – market forces tend to drive prices upward in response to an increased demand for petroleum products, at least in the short term. Therefore, the government can adopt a pricing regulation mechanism to help stabilise prices in the short term and prevent hoarding and scarcity of petroleum products. 

Transparency and Accountability: Transparency and accountability are critical components of the downstream sector. The government must ensure that there is adequate oversight, and that measures are put in place to prevent corruption, illegal activities, and price-fixing. 

Social Safety Net: Removing the subsidy without a social safety net will disproportionately affect the vulnerable sections of the population. Therefore, the government must put in place programmes that will cushion the impact of subsidy removal on low-income earners, women, youths, and other vulnerable groups through social welfare programmes. 

Conclusion

The removal of fuel subsidy in Nigeria is a contentious issue that raises concerns and challenges on the part of the government and citizens. The advantages of fuel subsidy removal are increased revenue to the government, reduced government expenditure, the attraction of foreign investment, and promotion of local refining. The disadvantages of subsidy removal include initial costs, unemployment, social unrest, and corruption. To mitigate these negative impacts, the government must intervene in the downstream sector by establishing modular refineries, promoting the use of alternative energy sources, price regulation, transparency, and social safety net programs.