Posted Tue, Jun 6, 2023 7:58 AM

Cost and Benefits of Fuel Subsidy in Nigeria

Fuel subsidy reform has been a recurring policy issue in Nigeria since the return of democratic rule in 1999. The issue has brought the government and the citizens to crossroads with no clear roadmap. In addition, Fuel subsidy in Nigeria is one of many consumption subsidy programmes of the government. It attempts to lower the fuel cost by providing direct financial support to oil firms, thereby lowering the fuel price for Nigerians.

The recent trend in government fuel subsidy bills and commitments have become escalated so much that it is outstripping the government's earnings from crude oil sales. As of H1-2023, the landing cost of fuel in Nigeria ranges between N500 – N600 and sells at an average of N200 nationwide. The government is, therefore, responsible for the N300 – N400 excess. In 2022 an estimated N2.74 trillion was paid as fuel subsidy, while just over N600 billion was made in oil revenue. Meanwhile, in the 2023 budget, N3.36 trillion was provided for fuel subsidy up to June 2023, while N2.23 trillion was projected for oil revenue for the year. The situation has degenerated, and the government borrows to pay for subsidy, making it unsustainable for the country.

With fuel subsidy removal coming to the fore again, it is important to understand how it benefits or constitutes cost to the country.

Benefits of Fuel Subsidy

• Welfare sustenance and affordability: Given the importance of fuel in the daily lives of Nigerians, fuel subsidy makes the product affordable and accessible, as well as sustains the welfare of the people in the face of higher crude oil prices. 
• Lower and stabilise prices: Due to the volatile nature of crude oil prices, which are the primary raw material in the production of petrol, fuel subsidy keeps the fuel price stable and lower for end users.
• Support and sustain industries: Fuel constitutes a major input for many businesses in Nigeria due to inadequate power supply and deficiency in transportation and logistics. Therefore, fuel subsidy sustains many businesses across sectors.
• Stimulate economic growth: With improved access and affordability, fuel subsidy can help stimulate economic activities and growth. 

Cost of Fuel Subsidy

• Opportunity cost on development spending: Fuel subsidy payment diverts part of the resource for developmental purposes towards consumption. Hence, the resources that should have gone into infrastructure, education, health, and security with positive externalities are going into consumption.
• Strain on government's fiscal space: The ever-growing fuel subsidy bills continue to hit deep into government resources. With revenue shortage, fuel subsidy payment means the government will need to borrow to invest in order aspects of governance.
• Market distortion and inefficiency: By nature, subsidy deviates the prices from market clearing prices. Coupled with the opaqueness in the process, the activities in the market are often disrupted as players wait on the government for clearance. The product is often unavailable, and people often buy at higher prices than the market price.
• Disincentivises investment: Fuel subsidy discourages investors in the sector as they cannot guarantee their operations efficiency, profitability, and competitiveness due to market distortions.
• Shortage of supply: The lower-than-market clearing price causes scarcity. It discourages producers and suppliers from entering the market and is often associated with excess consumption. Besides, the fact that neighbouring economies operate at market-clearing prices encourages the smuggling of subsidised products out of the country. Therefore, fuel subsidy causes scarcity of fuel in the market.
• Rips of oil sale benefit: Nigeria is a major oil-producing country but depends on imports for fuel. With fuel subsidy in place, the government is ploughing back its earnings regarding foreign exchange and revenue to fuel imports. Therefore, foreign exchange earnings and government revenue is ripped off on the spot with little to commit to public finance.
• Breed rent-seeking and corruption: Because of the opacity and weakness in oversight of the process, fuel subsidy payment has allowed unethical and corrupt practices such as the inflation of landing costs and padding fuel import bills.

While the many downsides of the current fuel subsidy regime are apparent, the benefits cannot be undermined. Fuel forms the primary energy source for most MSMEs and households, as electricity from national greed is barely available. Also, fuel is a major input in most MSMEs and households' transport and logistic framework. Therefore, the government must reduce their fuel dependence to alleviate the adverse impact of potential fuel subsidy removal.

Read the Real Impact of Ending Nigeria's Fuel Subsidy Programme