Fuel Subsidy: Is the Forceful Removal Good Enough?

Fuel subsidy has been one of the main agenda which President Bola Tinubu stressed during his campaign and even at his inauguration say. He stated categorically that his government will remove fuel subsidies and increase the production of PMS.

However, the sudden implementation of the removal of fuel subsidies has caused more harm than good for Nigerians who commute daily to their places of work. According to the report published by the Nigerian National Petroleum Company (NNPC) Limited, working with the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) shows that the price of a liter of fuel which was supposedly N182 to N185 per liter before the swearing in of Bola Tinubu as president has shot up to N448 per liter in Lagos to N537 in Abuja while the North is experiencing worst.

Before answering the question of whether the removal of fuel subsidies is good, Investingport will give you some key factors to judge if the forceful removal of fuel subsidies is good or bad.

Subsidy Financial Expenses Is Unsustainable

Nigeria's overall income in 2000 was USD 10.8 billion, according to the World Bank. By 2010, this figure had risen to USD 67.9 billion, despite the fact that the Nigerian government spent more than USD 30 billion on fuel subsidies within the past 18 years. This has affected the finances available for important infrastructure as well as other key sectors such as education, health, and defense.

Furthermore, the country's public debt stock is increasing, according to the Debt Management Office-the government has to borrow N1 trillion to pay fuel subsidies in 2022 to keep up with the policy.

The Exploitation of the Economy

A study found that less than 3% of all fuel is purchased by households in the lowest 40% of the income distribution. In addition, it has been estimated that commercial enterprises in Nigeria utilize 75 % of the country's total fuel supply.

Diesel is the fuel preferred for vehicles that transport huge numbers of people (like molue) and cargo, and its usage has recently been liberalized. In addition, the poor no longer receive subsidies for household paraffin, so they must pay market prices for the fuel they consume.

If this is the case, then the government is providing subsidies to the middle class rather than the impoverished. This is a big issue that has arisen as a result of the gasoline subsidy program in Nigeria.

Issues of Smuggling

Due to open borders, smugglers acquire massive volumes of cheap fuel in Nigeria and sell it at market prices in neighbouring nations.

In June 2022, the managing director of NNPC Limited claimed that daily fuel usage had risen to over 103 million liters, with at least 58 million liters being smuggled.

Petroleum subsidies are higher for smugglers and other West African countries than for Nigerians.

Chapel Hill Denham thinks that 15.64 million gallons of fuel are smuggled out of Nigeria every day because Nigerian petroleum products are 3.7 times cheaper than those of its neighbours, providing trading opportunities for smugglers.

Investment

Despite the recent implementation of the Petroleum Industry Act (PIA), over 70 years after the official discovery of crude oil in Nigeria, the country's oil and gas downstream industry has failed to grow to the predicted levels. The downstream sector of the oil and gas industry received the least foreign direct investment when compared to the midstream and upstream sectors, and the rationale is not difficult to understand. The existing subsidy structure and the downstream sector's legislative framework usually limit investment.

Petrol Price Increases, Inflation, and Cost of Living

Due to the instability of the electricity supply, the price of fuel is a major factor in the cost of living, according to the Price Water Coopers in Nigeria (PWC) report Fuel Subsidy in Nigeria - Issues, Challenges, and the Way Forward. As a result, a nationwide rise in fuel costs may not take long to get through.

Research also implies a psychological impact, since the psychological significance of cheap and economical fuel is high. When the price of fuel goes up, small businesses often raise their prices to make up for the increase. This can make it more difficult for people to afford the things they need, adding to poverty and inequality.

The research discovered that the impacts of fuel price deregulation on inflation and living costs might be reduced with appropriate regulations and a well-planned implementation strategy.

Judgment for the Sudden Removal of Fuel Subsidy

Dr. Josef Onoh, the former Southeast spokesman for President Bola Tinubu, has advised that Nigeria will be better off when the high cost of petroleum subsidy is removed and the money is diverted to other sectors of the economy that will directly affect middle- and low-class citizens.

He said that even though President Tinubu hasn't officially declared the withdrawal of the heated fuel subsidy, Nigerians should look at other nations, particularly in Africa, that were bold enough to remove the huge cost of subsidizing the consumption of foreign petroleum products, which mostly benefit the rich who have more cars than the poor who use public transportation.

Onoh urged Nigerians and any groups that are warming up for agitation against the new government of Bola Tinubu to be critical and understand that President Tinubu did not remove the oil subsidy by himself, but that no provision was made in the 2023 appropriation to fund the luxury of subsidizing the importation of petroleum products, which currently costs $867 million or N400 billion per month for products that are essentially consumed by the upper class.

Onoh highlighted Ghana, which was paying $25.6 million every two weeks on gasoline subsidies until it freed itself from the subsidy bondage and became stable.

He also compared the Republic of Cameroon, which removed oil subsidies and deregulated its markets, to Nigerian experts like Dr. Akinwumi Adesina, President of the African Development Bank (ADB), who recommended removing oil subsidies, which cost the Nigerian economy $10 billion in 2022.

Onoh cited Egypt, which in 2019 ended its subsidy oppression and implemented an International Monetary Fund (IMF) economic overhaul template, even though petrol, diesel, and kerosene were sold at 85 to 90 percent international cost within Egypt before it completely broke the yoke and liberated the country.

Onoh said that during the electioneering campaign and debates, all presidential candidates of all political parties supported the abolition of oil subsidies, not just Tinubu.

These were the words of Dr. Josef Onoh

“Ghana removed the subsidy after 30 years, and if you look at the progress and the economic stability in present-day Ghana, Nigerians will know that we cannot continue with oil subsidy at the detriment of our economic stability. Both the rich and the poor will face hardship but we should look at the collected benefit rather than the immediate hardship.

“There is no other way because we are caught in between the devil and the deep blue sea. There is no way we can continue benefiting the rich while the poor get poorer. The only way we can have a balanced economy is when even the poor can have access to these basic needs. In the short term, the removal will cause panic but the cabals behind the refusal to remove the fuel subsidy are the greatest beneficiaries of that subsidy.

“So, they will play in the minds of the innocent poor, trying to make it look as if the government is against the poor, but the Tinubu administration is eager to balance our economy just like other countries have done. We should sustain that confidence,” Onoh said.

• He said that the governments of Canada, the United Kingdom, the United States, and other nations will have more faith in the Nigerian economy.

“But we also need to show that we want our economy to grow and we cannot continue to rely on half-term measures, riding on a Tiger’s back, not thinking it could as well turn around to kill us. So we should back this administration.

“The test of our Progress is not whether we avoid temporarily removing the fuel subsidy out of fear of hardship for Nigerians which in turn will add to the abundance of those who have much and are beneficiaries of the subsidy, rather it is whether the current administration provides enough after it’s removal for those who have too little,” Onoh encouraged.