Posted Mon, Jun 5, 2023 9:40 AM

Understanding What Subsidy Programmes Entail

What are Subsidies?

Subsidies are direct or indirect payments made by the government to businesses or individuals. Direct subsidies involve cash payments from the government to the recipient. With indirect subsidies, on the other hand, industries or households enjoy certain economic benefits from government policies such as tax breaks.

Subsidies are generally implemented to promote consumption and production. For instance, if the government makes direct payments to rice farmers, this could increase rice production by reducing the production costs accruing to the farmers. This is an example of an agricultural subsidy.

The types of subsidies present in Nigeria are discussed further below.

Subsidies in Nigeria

The key subsidies in Nigeria include exchange rate, agricultural and fuel (Premium Motor Spirit or PMS). Nigeria has been subsidising its exchange rate by allowing multiple exchange rate windows. Although the government has adopted the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) as the official exchange rate, which has enhanced the country's exchange rate system - the government still faces an artificially low rate (below the NAFEX), which means that it receives less domestic currency in its dealings with the Central Bank of Nigeria than it otherwise would if the rate reflected the market.

Nigeria has also implemented agricultural subsidies such as through the Growth Enhancement Support Scheme (GESS), a programme developed to boost agricultural production by providing agricultural inputs subsidies to small-scale farmers. According to the Global Trade Alert, in July 2021, the Nigerian government announced the disbursement of N12.3 billion in subsidies to the agriculture sector.

Multiple energy subsidies have also existed in the country, although these subsidies are being phased out. Aside from the PMS subsidy, Nigeria, in the past, had subsidies on kerosene and electricity. The subsidy on household kerosene was removed in 2016. Until recently, Nigeria also had an electricity subsidy which had been in effect since 2013 when the power sector was privatised. The electricity subsidy was removed in 2022 following a tariff review. Before its removal, electricity subsidies represented about 9 percent of the Federal government's non-oil revenues, according to the World Bank's Nigeria Public Finance Review. The incoming administration also plans to remove the subsidy on PMS, which has been in effect since 1977. 

The government has unsuccessfully attempted to remove the petrol subsidy on multiple occasions. The decision to end the petrol subsidy regime was met with protests at its first attempt in January 2012. Other bids at removal in May 2016 and March 2020, amid sharp falls in the oil price, were unsuccessful because the government reneged on its decision.

A closer look at Nigeria's fuel subsidy

PMS is currently the only subsidised petroleum product in Nigeria. In this case, the government sets the price of petrol below the internationally competitive price, keeping the price of petrol artificially low – below the market rate - which makes the product more affordable to consumers.

The petrol subsidy is operated through the Nigerian National Petroleum Company Limited (NNPC Ltd), formerly NNPC, which sells the petrol it obtains at the international price at a subsidised price to local distributors. The fuel subsidy is equal to the volume of petrol imported multiplied by the difference between the import price of petrol and the discounted price. The fuel subsidy has supported relatively low petrol prices. At N165 per litre, Nigeria had one of the world's lowest petrol prices as of June 2022, according to the World Bank.

The PMS/fuel subsidy, which has been in effect for decades, is undoubtedly the most debated in Nigeria, particularly in recent times, as subsidy payments have risen sharply amid low oil production and dwindling government revenues. The implications of sharp increases in fuel subsidy payments for government finances have led to calls for its removal. For instance, fuel subsidy payments were estimated at 2.74 trillion in 2022, up from N310 billion in 2015 – representing a colossal leap of 783.9 percent.

Despite the benefits they might confer on private businesses and individuals, in most cases, subsidies can be costly for the government, leading to calls for their removal. This situation has been observed in Nigeria with energy subsidies, such as electricity and petrol subsidies. The Nigerian Economic Summit Group (NESG) also supports the call for subsidy removal through a gradual phasing-out approach. 

Read the Cost and Benefits of Fuel Subsidy in Nigeria