Subsidies were first introduced in Nigeria in the 1970s as a response to the Oil Price shock of 1973 as the situation of the shock led to a global rise in oil prices and if the international rates were to be used would have made Nigerians pay more, thereby forcing the government to regulate local prices for energy products.
Thus, a decree which was further enacted in 1977 institutionalized subsidies in Nigeria.
When former President Goodluck Jonathan in 2012 announced the removal of fuel subsidies, there were massive protests in the country and in a bid to remove subsidy had increased fuel price from N65 to N141.
A similar protest was held in 2000 when former President Olusegun Obasanjo attempted to remove fuel subsidies which he said cost the government $2 billion annually as of then.
The Muhammadu Buhari, government made a push in 2021 announcing plans to remove petroleum subsidies from 2022 a development that equally elicited different reactions across the country.
The year 2015 was the first year the Buhari-led administration raised the issue of fuel subsidy removal after there was no budgetary provision for subsidy in 2016.
In 2016, then Vice President, Yemi Osinbajo, was quoted as saying that the country saved N15.4 billion monthly from non-payment of subsidy for the year.
Despite subsidy, except for a short period in 2016, fuel prices in the country have increased considerably between 2015 and 2021 in Nigeria. In 2020 however, there was a dip in price when the Crude Oil price crashed to N125 from 145. The government noted that the fall in the price of Crude Oil globally caused the decrease in price. The price increased again to N165 in 2021 from the earlier N125 pegged in 2020.
According to data, in 2011 alone, Nigeria’s fuel subsidy cost the country an estimated $8 billion and the price tag for 2012 was expected to be even greater. This does not even take into account the country’s losses due to market distortions as a result of the subsidy. While politically costly in the short run, if Nigeria’s government can implement transparent and well-structured reforms, the funds from the fuel subsidy program could be put to far greater use, experts posited.
With an estimated 37.2 billion barrels of proven oil reserves, Nigeria is one of the world’s largest oil producers. However, the country’s mineral riches have not resulted in a significant improvement in the quality of life for the majority of Nigeria’s citizens, 54 per cent of whom live below the national poverty line.
In 2010, Nigeria earned $59 billion from oil exports thus Nigeria does not lack the resources to reach its development goals, rather its resources have been utilized inefficiently.
Counting Cost Of Fuel Subsidy
The cost of the fuel subsidy in Nigeria has continued to grow exponentially and this is partly due to the rising cost of fuel which meant that the government had to spend even more to keep domestic prices low and also due to Nigeria’s increasing population which resulted in increased fuel consumption; together these pressures made the cost of the fuel subsidy unsustainable.
The price of crude oil increased from $30.4 dollars per barrel in 2000 to $94.9 in 2010 over the same period Nigeria’s population increased from about 123 million to 158 million.
By 2011, the fuel subsidy accounted for 30 per cent of the Nigerian government’s expenditure and it was about 4 per cent of GDP and 118 per cent of the capital budget.
Nigeria’s fuel subsidy continues to crowd out other development spending and by comparison,, Nigeria’s total allocation for education is about $2.2 billion and it is not much higher for health care. Infant mortality in Nigeria remains unacceptably high at 90.4 per 1,000 live births. In 2004, it was estimated that only 15 per cent of the country’s roads were paved. The $8 billion from the fuel subsidy could help to address some of these issues.
In addition, keeping the domestic price of oil artificially low with the fuel subsidy has discouraged additional investment in Nigeria’s oil sector. This is especially problematic given that the oil sector is the lifeblood of the Nigerian economy. Since 2000, Nigeria has issued at least 20 refinery licenses to private companies. However, not one refinery has been built because investors could not recoup their investment under the artificially low price structure.
The costs of fuel subsidy in Nigeria increased by 890 per cent over a five year period (2017-2021) in Nigeria even though fuel prices have only increased by 12.1 per cent.
This was disclosed by socioeconomic research firm, SBM Intelligence in its report titled “Growing fuel prices and transport costs: Which way Nigeria.”
LEADERSHIP Weekend reports that the Nigerian National Petroleum Company Limited, NNPCL, spent about N5.3 trillion of its profit to subsidise petrol between 2017 and 2022.
Promoting Illicit Enterprises
With cross border smuggling it has been difficult to ascertain the actual domestic consumption figures of petrol.
Way back in 2018 the NNPCL became frustrated about the proliferation of fuel stations in communities at the nation’s borders which has led to an unprecedented smuggling of petrol to neighboring countries. This has made it difficult to sanitise the supply and distribution matrix in the country.
As at that time based on the heightened petrol consumption rate of 50 million litre per day, the company was incurring an under-recovery of N774 million daily. Under-recovery is the difference between the landing cost and the cost at the pump station.
Experts have said that Nigeria’s inability to account for the amount of petrol it consumes daily was due to the continued smuggling of petrol through its porous land borders.
In 2019, Nigeria shut its land borders as part of government’s sustained efforts to check smuggling and other illicit cross-border activities.
Taking The Bull By The Horn
Though Petrol prices have nearly tripled after President Bola Tinubu said his administration would no longer subsidize gasoline for citizens of Africa’s largest oil producer.
In a seemingly off-the-cuff remark during his inaugural speech Monday, May 29, Tinubu declared, “the fuel subsidy is gone,” adding that it was unsustainable. The rising costs could not be justified as resources dwindle, he said.
“We shall instead re-channel the funds into better investment in public infrastructure, education, healthcare and jobs that will materially improve the lives of millions,” Tinubu added.
It’s a drastic move for a country in which cheap petrol has been a feature of daily life for decades and a lifeline to millions of Nigerians facing economic hardships. The last time the government tried to remove fuel subsidies in 2012, it sparked nationwide protests.
Meanwhile, the Group Chief Executive Officer, GCEO of NNPCL, Mallam Mele Kyari, noted that the removal of the subsidy which has been a burden on NNPCL cash flow will free up funds to enable optimal operations in the company.
The Company while reacting to scarcity already being experienced, assured Nigerians of sufficient supply of the product.
Kyari, said the NNPCL is also monitoring all its distribution networks to ensure compliance
The Independent Petroleum Marketers Association of Nigeria, IPMAN, in a similar way assured compliance with laid down rules to ensure smooth distribution of products and to avert chaos.
Despite the unrest, artificial scarcity and price adjustments the decision to abolish Nigeria’s fuel subsidy is the right one, in the view of public analysts, stakeholders and economists.
National President of the Association, Elder Chinedu Okoronkwo, however confirmed to LEADERSHIP Weekend that the marketers are in full support of the new policy.
Similarly, Major Oil Marketers Association of Nigeria (MOMAN) and Depot and Petroleum Marketers Association of Nigeria (DAPPMAN) applaud and endorse the pronouncement by President Bola Ahmed Tinubu, on the phase-out of the petrol subsidy regime.
In a statement in Lagos, the Marketers, appreciated the clarity of policy from the Tinubu administration, a direction that signals a courageous and pragmatic shift in the nation’s economic trajectory.
“In light of the assurances given by the Nigerian National Petroleum Company Limited (NNPCL) and the
Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), we wish to reiterate
that there is no cause for alarm.
“We strongly urge Nigerians to avoid panic buying or stockpiling of petrol.
“This behavior not only creates artificial scarcity but also poses a significant safety hazard.” the statement added.
The Marketers noted that the NNPCL has assured Nigerians of adequate fuel supply and the NMDPRA is working closely with stakeholders to ensure a seamless transition.
“They are ensuring distribution channels remain uninterrupted, thereby making fuel readily available at all filling stations across the country.
“The decision to phase out this fuel subsidy regime is not merely a fiscal reform; it is a significant stride
toward social justice.
“We are heartened that the administration plans to redirect these substantial funds towards essential public goods such as infrastructure, education, and healthcare.
“ These investments symbolize our shared future, promising considerable, long-term benefits for all Nigerians.
We understand the concerns regarding potential price increases. However, we expect marketers to maintain reasonable pricing, as NNPCL remains the sole supplier of the product currently.
“We anticipate minimal changes regarding distribution costs, considering the cost of the product constitutes 80 per cent of the pump price. We pledge, in collaboration with the Nigerian Association of Road Transport Owners (NARTO) and other crucial stakeholders, to manage these distribution costs diligently to minimize their impact on the pump price.” they pledged.
Considering this clarity of policy, therefore asked products suppliers to continue supplying products to all legitimate marketers, and appealed to all stations to remain open and avoid hoarding products.
Also, the Centre for the Promotion of Private Enterprise (CPPE) has calculated that the federal government can generate a minimum of N10 trillion annually from the removal of fuel subsidy as well as elimination of the Central Bank of Nigeria (CBN)-subsidised foreign exchange window.
CPPE, in its Economic Agenda for the new Administration signed by its chief executive, Dr Muda Yusuf, said there was a need for the incoming government to prioritise macroeconomic stability with emphasis on moderating inflationary pressures, stabilising the exchange rate and boosting economic growth.
According to the CPPE, elimination of fuel subsidy will save an estimated N7 trillion annually, just as the “elimination of foreign exchange subsidy will unlock a minimum of N3 trillion revenue annually from the sale of CBN forex to the official foreign exchange window.”
CPPE also called for a foreign exchange policy reform to unlock inflows of capital into the economy, reduce arbitrage in the forex market and improve transparency in the forex allocation.
