The politico-economy of fuel subsidy



To begin with and as a backgrounder one needs to put the definition of Fuel Subsidy in proper perspective to further have a deeper understanding of the topic at hand. Fuel subsidy 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 so as to ease the price burden.

The Nigerian government subsidises things like electricity and petrol by paying the difference between the cost to produce and the cost charged customers with a view to making them more affordable. The bitter truth is that while government revenue from oil production rises, so too does Nigeria’s subsidies on petrol prices for the citizens.

Nigeria as Africa’s second biggest economy spends as much as $5bn in subsidy payments yearly according to Lagos based economic research and analysis firm Financial Derivatives Company, FDC. This is far beyond an earlier projection of $3.5bn by the immediate Minister of State for Petroleum Resources, Emmanuel Ibe Kachikwu.

The progressive government of President Buhari took ‘the bull by the horn’   courageously, boldly and patriotically stopped paying subsidy on patrol. After the government of Muhammadu Buhari stopped a costly and corrupt subsidy programme managed by his predecessor, Goodluck Jonathan, it has been keen to suggest that it is out of the subsidy game. Nigerians are of the view that the government’s spending may have changed, but it still pays the bill to insulate Nigerians from the full cost of petrol prices.

In contrast to paying subsidies to importers, as was done under President  Jonathan, the Buhari government has made the national oil company responsible for fuel imports and swallowing the difference between its costs and the price at the pump.

With global oil prices rising from $49.49 per barrel since Buhari took office in 2015 to as much as $70.28 in 2019, Nigeria’s subsidy costs have grown sharply. They soared 210% over a two month period, from a daily average cost of about N774m in March 2018 to N2.4bn per day in May, as the country grappled with fiscal deficits and rising debt levels.

Nigeria has finally bowed to long standing pressure to restructure the downstream sector of the Nigerian oil industry through the removal of fuel subsidy. It is therefore clear that the federal government has now abolished the fuel subsidy regime as full deregulation has set in. This comes as the global oil industry continues to grapple with the low demand and subsequent price slump that have been caused by the coronavirus pandemic which has ravaged the world since late last year.

According to the Group Managing Director of the Nigerian National Petroleum Corporation, NNPC, Mele Kyari, Nigeria would no longer be paying for under recovery or subsidy on petrol, especially due to the current development in the world. He said, “NNPC will play in the marketplace, it will just be another marketer in the space. But we will be there for the country to sustain the security of supply at market price.” The fuel subsidy policy in Nigeria was introduced as a means to stabilize the price of fuel .

An added advantage of subsidy removal in Nigeria  in the belief of the government is that the liberalization of the sector and the removal of subsidy will eliminate the incentive to smuggle petrol across the country’s various porous borders as the arbitrage which the smugglers used to enjoy will no longer exist. This then means that smuggling of petroleum products will no longer be profitable and a money spinner.

The NNPC boss went further to disclose that the removal of fuel  subsidy would help the federal government and the corporation to monitor and determine Nigeria’s actual consumption pattern of the product. The national oil firm puts the daily consumption of petrol in the country at about 55 million litres and at an average subsidy spending of N37.4 on every litre of petrol, the NNPC spends about N750.81bn as petrol subsidy annually.

The removal of subsidy has sparked controversies and protests across the length and breadth of the country due to the widely held belief that the sufferings of Nigerians will only get worse as it will have adverse effects on the economy that will further result in spiral increase in prices of goods and services.

The Nigerian government has since given assurance that it will spend the money saved as a result of removing the subsidy on improving the country’s erratic power supply, as well as improving its health and educational sectors. No one doubts this as long as President Buhari is incharge.

Kyari, recently announced an end to the subsidy currently applicable to the price of Premium Motor Spirit, PMS, also known as petrol or fuel. This announcement follows the decision of the federal government of Nigeria to reduce the pump price of petrol from N145 per litre to between N123.50 and N125, following the steep drop in oil prices due to the prevailing low demand for oil, owing to a global economic shutdown brought about by the COVID-19 pandemic. 

Fuel subsidy has historically been a divisive issue in Nigeria, with statistics showing that Nigeria spent at least N10 trillion on fuel subsidy between 2006 and 2018. In the midst of reports that Nigeria projected to spend N750.81billion on petrol subsidy in 2020. Many Nigerians have argued that fuel subsidy benefits only the rich and the funds spent on petrol subsidy would be more appropriately applied to fixing Nigeria’s huge infrastructure deficit, as well as providing funding for medium, small and medium scale enterprises in Nigeria to benefit a wider spectrum of the society.

Many stakeholders consider that the crash in global oil prices, leading to the low cost of petrol make this an appropriate time to consider the removal of fuel subsidy and this no doubt played a factor in prompting Nigerian government’s declarations. Despite its negatives, petrol subsidy has its positives several fold as it will save the country the much needed funds for the infrastructural development of the country. It is every Nigerian’s hope that the government will just do the needful and change the face of Nigeria’s  infrastructure for the good of all.

With the confidence we all have in our leader, President Buhari, Nigeria will soon be a beehive of activities, foreign investments and a host of other benefits post Covid-19. What is expected of all Nigerians is to offer maximum support and cooperation to enable us move faster to the PMB’s/APC’s NEXT LEVEL of  Nigeria in growth, development and prosperity.

Ilallah writes from Abuja

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