Nigeria and Fuel subsidy

Nicholas Uchenna Ugwu Written by Nicholas Uchenna Ugwu · 1 min read >

In the past, Nigerians’ sole source of wealth came from the exportation of agricultural goods. This persisted up to the discovery of oil in our nation, particularly in the Port Harcourt region. This caused Nigerians to switch from farming to oil exportation to other nations, which was earning them a lot of money even at this time.

Fuel subsidies exist in Nigeria and date as far back as the 1970s as a response to the oil price shock of 1973. Subsidies exist because the government fixes the price of gasoline for consumers below the international price and uses government resources to pay for the difference. This means that a fraction of the price that consumers are supposed to pay to enjoy the use of petroleum products is paid by the government to ease the price burden.

But despite several reform initiatives, Nigeria has never been able to eliminate gasoline subsidies, largely because of the fierce public hostility to reform. The cost of these subsidies is high: less money is spent on other development goals, fewer resources are distributed to state governments, the wealthier Nigerians receive most of the subsidies, and cheaper gas encourages more traffic congestion, pollution, and climate change. Despite this, over 70% of Nigerians reject cutting or eliminating subsidies.

The World Bank says increasing fuel subsidy puts the Nigerian economy at a high risk as subsidy payments could significantly impact public finance and pose debt sustainability concerns. It added that the high cost of fuel subsidies, due to the increase in oil prices, may deteriorate the country’s fiscal balance.

Another impact of fuel subsidies is the loss of investment opportunities and job creation. While it is difficult to directly measure this impact, it’s obvious that the subsidy prevents investors from putting out resources into oil and gas in Nigeria as the price of the product is controlled by the government. Therefore, there is fear of huge control on the sector by the government and so investors are not attracted to it. The loss of investment also reduces the employment opportunities that could have been provided if such investments are made. Also, the earnings by the government from taxes that could have been paid by such companies should there have been more investment in the sector is also lost.

Moreover, those opposed to subsidy removal fail to understand that the current subsidy regime also fuels current inflation through higher budget deficits that are financed through ways and means and other forms of public debt. It is not only increasing our debt profile but also contributing to the high inflation rate.

It is also important to mention that subsidies create room for more corruption as people use them to corner public funds in the name of subsidy. Resources that should have been used to better society land in private pockets.

Furthermore, Nigeria has witnessed multiple fuel scarcities because of fuel subsidies.  When this scarcity occurs, it disrupts business operations and further cripple the economy.

Why there are numerous impacts of fuel subsidy in the Nigerian economy, over 70 percent of Nigerians still oppose subsidy removal. It will take a committed government regime to strongly convince Nigerians to come to terms that the removal of fuel subsidies is just the way forward.



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