The Nigerian Fuel Subsidy Saga, Its Diverse Impact, and the Dynamics of a Deregulated Market
The recent removal of this subsidy as one of the first actions taken by the newly appointed President Tinubu has been seen in three core ways: A good thing for the development of the economy, a bad thing for the people, or a just poorly thought-out action. All are correct in their own rights.
Much has been said about the dire economic situation of Nigerians for the past few years – from rising inflation led by an increase in food inflation, interest rates at double digits, and Nigeria’s weakening currency despite the many actions taken by the CBN and the Federal Government to resuscitate it. With the recent removal of fuel subsidy by the newly appointed Tinubu administration, it appears that Nigerians can’t seem to get a break.
The federal government of Nigeria for years had subsidized petrol. The recent removal of this subsidy as one of the first actions taken by the newly appointed President Tinubu has been seen in three core ways: A good thing for the development of the economy, a bad thing for the people, or a just poorly thought-out action. All are correct in their own rights.
Top of the list is that we can all agree that the impact of a circa 200% increase in fuel price with no succour is in the first instance a sure way push more people below the poverty line with its reduction in purchasing power as well as a general rise in commodity prices. For a country with no solid public transportation network, the negative impact on personal economies is instant. As quickly as the pump price of fuel rises, everything from food, essential commodities, transportation, housing, etc, also rises. Of course, there has also been no increase in disposable income; for a people that already spend a majority of their income on food, the average Nigerian is getting a far worse quality of living.
Interestingly, Nigerians weren’t the only ones affected. Ever since Nigeria removed the subsidy on May 29, 2023, fuel prices have also climbed up in neighbouring countries. After the removal of fuel subsidy, Nigeria's average pump price increased to 532.5 Naira from 165 naira as at the preceding year. Ghana saw an increase from 450 Naira in 2022 to 948.3 Naira. Countries such as Togo, Benin and Cameroon also witnessed an increase in average fuel pump prices as in the visualization above. While it has indeed solved the previously worrisome challenge of smugglers taking advantage of Nigeria’s low prices, one can say the negative impact has been far reaching, beyond our borders.
Those in favour of it, however, also have their reasons. For them, if the temporary suffering will lead to a better and more developed nation, then it’s a sacrifice worth making – and fast too given the many stalled attempts at removing it. Specifically, they speak about the need to free up government revenue. According to Nigeria Extractive Industries Transparency Initiative (NEITI), between 2005 and 2021, Nigeria spent a whooping 13.7 trillion Naira to finance fuel subsidy. This entire amount which is now down the drain could certainly have done a lot in revolutionizing Nigeria’s energy (power and downstream petroleum) sector, making the country a net exporter of refined petroleum products.
“Despite being the world’s 8th largest producer of crude oil, subsidy has made private investment in the downstream sector largely unattractive. The combined effect of fuel subsidy and products importation is responsible for a large part of Nigeria’s current economic challenges including low GDP growth in the petroleum sector, foreign exchange and balance of payments problems, and a worsening debt profile.” - NEITI
The rationale behind the removal, therefore, is to free up funds for capital expansion rather than a recurring subsidy that ultimately becomes sunk cost. While the motive has much sense to it, many worries persist.
The first and clearest is the cost of governance. Another is what exactly will be done with the cost savings. President Tinubu didn’t make this fear easier with his announcement of palliatives of N8,000 to 12 million poor households in the country. Expectedly, the pushbacks have been in doves for apparent reasons.
Finally, those who believe it was ill-timed or not implemented correctly simply suggest that the systems required for such an instant action should first have been put in place to reduce the weight of its impact on already struggling citizens.
A post subsidy era
Following the announcement for the removal of subsidy, NNPC released a list of their new prices showing different locations and their prices. Previously, NNPC has been the country’s sole importer of petroleum products with a core reason being the lack of access to the required foreign exchange at the official window for others to compete.
However, with its deregulation, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has revealed that over 56 companies had applied for licences to import petrol into the country and six oil marketers have been granted the opportunity to start importing. What this means is that market forces will now dictate prices.
The implication of this is first that the market forces of demand and supply will be in full force. From a negative perspective, it means that depending on the economic situation – say a scarcity of some sort or changes in FX unfurl, prices could get significantly worse overnight. It is why just a few weeks ago, prices in many parts of Nigeria surged as high as 617 Naira per litre.
This, however, is not all negative. Breaking the age-long monopoly of NNPC means the market will decide the prices. It also means competition will also come in. It means the PMS market will see increased investments that will boost the industry. All Nigerians require is the right (perfect) information to make effective buying decisions enough to also be key players in the industry. With perfect pricing information, there will be increased transparency and competition which too will play a core role in driving down prices and bettering their standard of living.