Why fuel subsidy removal goals may fail


Recently, the Federal Government disclosed that it will begin a gradual removal of the petrol subsidy from April 2023, about three months ahead of the initial plan to effect a complete stop. What has continued to ponder on the mind is that can this end the scarcity of fuel in the country?

The Minister of Finance Budget and National Planning, Mrs Zainab Ahmed,  who dropped this hint on Tuesday during an interview with ARISE TV on the sidelines of the World Economic Forum in Davos, Switzerland, also said the subsidy removal appears to be the position of all contestants to the leadership of the country in their political campaigns for next month’s general elections.

She stated, “What will be safer is for the current administration to start removing the fuel subsidy   at the beginning of the second quarter.  This according to  her is more expedient if you remove it gradually than to wait and move it all in one big swoop.” After 18-month extension, the Federal Government plans to spend N3.35 trillion on petrol subsidies from January till June 2023.

The extension, however, generated widespread debate on the expediency of such expenditure as it will increase the budget deficit of the FG which would be financed through additional borrowing and hence further rise in the nation’s public debt which stood at N44.06 trillion as at end of September 2022.

The history of fuel subsidies is traceable to the ’70s, they were first introduced in Nigeria in the 1970s as a response to the oil price shock in 1973. However, despite numerous attempts at reform, Nigeria has never successfully removed fuel subsidies, in large part due to strong popular opposition to reform. Such subsidies come at a great cost: spending on other development objectives is lower; the distribution of resources to the state governments is reduced; the vast majority of the subsidy goes to better off Nigerians; and cheaper gasoline encourages greater pollution, congestion, and climate change. Despite this, a survey conducted by the ICTD indicates that 70 per cent of Nigerians oppose the reduction or removal of subsidies.

In debating the merits of fuel subsidy removal, it is important to understand who benefits the most from the program. Contrary to popular belief, according to the World Bank, it is the rich, not the poor who disproportionally benefit from Nigeria’s fuel subsidy. With the government subsidising the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy.

Nigeria’s poor rely primarily on public transportation as such their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles. Neighbouring countries also benefit significantly from Nigeria’s fuel subsidy through smuggling. In addition, the World Bank, for instance, in the development update had said the poorest 40 per cent in Nigeria consume less than 3 pe cent  of the total PMS in the country, highlighting that the rich were benefitting more from the subsidies.

The Federal Government has displayed outright treachery by sticking wholesomely to the importation of petroleum products as if there alone lies the solution. For instance, in sticking only with products importation, the NNPC is already claiming that the source of its subsidy is because of a higher landing cost than that of the PPPRA. Under the current subsidy regime, the NNPC claimed  it is under-recovery and has left the pump price at a band between N162 and N165 per litre. If you compare that with the PPPRA landing cost of N264.65 per litre there exists subsidy or an under recovery of N102.65 per litre according to the officials.

In the report, PwC noted that Nigeria is the second largest producer of oil in Africa, producing over 1.5 million bpd (as of January 2017). With proven crude oil reserve estimates of about 37 billion barrels as at 2015, Nigeria boasts of about 29 per  cent of the continent’s crude reserves (2nd in Africa). Nigeria is also one of the largest consumers of refined products in Africa (5th as at 2014, behind Egypt, South Africa, Algeria, and Morocco) and accounts for over 7 per cent of Africa’s refined products consumption.

It noted that in 2015, the consumption of refined products was estimated to be about 24 billion litres and products consumed include Premium Motor Spirit (PMS), Automotive Gas Oil (AGO), Dual Purpose Kerosene (DPK) and Aviation Turbine Kerosene (ATK). To the detriment of national earnings, these products are majorly imported from United States, North-Western Europe and other sources.

The PwC went ahead to clearly outline how local refining was the way to go for Nigeria, arguing that imports currently account for over 80 per cent of Nigeria’s refined product supply, creating a huge potential for local refining. The West African market also holds significant potential as refineries such as SIR (Ivory Coast), SOGARA (Gabon) and SAR (Senegal) cannot meet the current demand for refined products in the region, estimated at 39 billion litres. There is an opportunity for potential uptake by neighbouring countries if the market has Nigeria’s refined products readily available.

The Federal Government should deploy all machineries in resolving issues relating to criminals activities surrounding the  nation’s energy sector. Saboteurs should be brought to book and be punished appropriately than playing politics with the issue of fuel subsidy.

Eventually, the ordinary Nigerian does not have direct benefits whether the fuel subsidy is removed or not considering the masquerading chains of corruption surrounding the energy sector from the regulators, marketers and oil thiefs.