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Posted Wed, Jun 7, 2023 10:09 AM

The Real Impact of Ending Nigeria's Fuel Subsidy Programme

Fuel subsidy reform is critical to the survival of the Nigerian economy, given its current state and the government's inability to sustain the programme. However, if the removal is poorly planned, the reform may increase prices, worsening people's welfare and harming businesses and the economy. A broader social and economic analysis of the actual cost of fuel subsidies is required to assist the public in understanding the opportunity cost of continuing or discontinuing the program.

Short-term consequences of fuel subsidy removal:

  1. high fuel costs with a ripple effect on the cost of business operations,
  2. lower labour productivity due to spillover effects on other economic activities,
  3. increased inflationary pressures due to high costs of goods and services, and
  4. risk of lowering citizens' welfare, particularly among poor and marginalised households. These are the most common pro-fuel subsidy arguments.

Beyond the immediate consequences, it is critical to consider the long-term development opportunity cost of ending the fuel subsidy program. This examination of the real impact uses the four critical components of the Nigerian economy.

Government Finance

Table 1: Government Gross Revenue & Fuel Subsidy Analysis

Data: World Bank; OAFG                                                                                                                                                        Chart: NESG Research

 

Given the recent significant deterioration in public finances, resources allocated towards sustaining fuel subsidy programme are needed for developmental purposes. Fuel subsidies gulped N6.34 trillion between 2020 and 2022, equivalent to an average of 3.5% of Nigeria's GDP over the period. This figure shows a significant crowding-out of resources that can be committed to other areas such as education, health services and infrastructural development.

Ending the current under-pricing of fuel may also create the much-needed fiscal space, redirect resources into more productive spending and improve development outcomes that would result in net positive benefits for the country. For example, the total spending of N4.8 trillion on fuel subsidies in 2022 was higher than the budgetary allocation to education, health & infrastructural development in the year (N3.53 trillion). Aside from reducing government fiscal pressure, revenue previously sapped by the subsidy programme can be deployed for development purposes.

Macroeconomic Effects

In addition to the impact on government finance, there are macroeconomic costs that may result from the government's decision to end the fuel subsidy programme. Since Nigeria is a net importer of fuel, the global price of refined petroleum affects fiscal balances, exchange rate volatility, inflation and income inequality. Combining these macroeconomic conditions with fuel subsidy commitments will adversely affect economic growth. Furthermore, government reliance on internal and external borrowings to finance subsidies will further amplify inflation and currency depreciation.

An end to the programme will significantly ease internally and externally induced macroeconomic pressure. This will, in turn, increase the people's real income, unlock domestic investments and enhance foreign investment inflows.

Businesses

Although affected by the initial policy shock, business sectors will ultimately benefit from the fuel subsidy removal in the long run. The environment enjoys some certainty about the cost of inputs. At the same time, a substantial level of private investments will also be attracted into the oil & gas sector, which is not possible during the subsidy regime.

With more private investments in the upstream and downstream oil & gas sector, the sector can end its abysmal performance and contribute adequately to the economy. Associated sectors such as petrochemicals, manufacturing, agriculture and distributive trade will experience significant improvements in output and productivity. With more private investments in pipelines, storage facilities, transportation and retail outlets, Nigeria will eventually become a net exporter of refined petroleum products.

The business sector will also benefit from the foreign exchange effects accompanying the post-fuel subsidy era in Nigeria. The country will be able to save more foreign earnings as fuel imports progressively decline and increase its fiscal buffers as external reserves grow. Thus, creating an environment for meeting the Forex requirements of businesses importing needed goods, especially intermediate goods and services. 

Households

As highlighted above, most arguments against the stoppage of fuel subsidies centre on the knock-on effects of the policy on the citizens. Higher fuel prices trickle down to other goods, affecting living costs and making many goods and services less affordable. Thus, making subsidy removal politically tricky. However, the households are notably the final beneficiary of this policy due to the add-on effects of improved infrastructure facilities and price stability in the long term as well as other tangential support measures by the government in the short term. 

Improvement in the performance of the sector business, as highlighted above, would translate to massive quality jobs and help cushion the initial shocks occasioned by the policy. If this tempo is sustained, it would reduce the country's unemployment and increase welfare for many households. 

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