Fuel Subsidy Removal And The Nigerian Economy; Advantages And Disadvantages. Monday 2nd, January 2012 Nigerians took to the streets to protest a fuel subsidy removal by the then Federal Government led by President Goodluck Jonathan. This was a ₦32 increase on the ₦65 pump price to ₦97; this conflict was resolved with the PMS pump rise stabilized at ₦86/litre. In May 2016, under the present leadership of President Muhammadu Buhari, the pump price was increased by 59.3% to N145, this is a partial deregulation of the downstream sector of the nation’s oil and gas industry.
Subsidy is a grant paid by a government or a public organization to an enterprise that benefits the citizens or members so that price of a commodity or service may be affordable. This could either be in form of financial aids, interest free loans, cash payments, tax reduction, with the aim of promoting socio-economic growth. Fuel subsidy is the Nigerian Government’s financial aid to Nigerians to enable the consumption of fuel at a cheaper rate, end unpredictable supply, and ensure stability in domestic fuel price. According to Vanguard, Nigeria spent about N10 trillion on subsidy payments; between 2006 and 2013.
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According to OPEC, the four refineries have a combined production capacity of 445,000 barrels/day and a daily crude output of 2.44m barrels/day as of February 2015. With an oil demand of 396,000 barrels/day, and NNPC supplying only of 8% of the nation’s requirement, the government created a subsidy scheme to assist in filling the gap for further oil requirements.
Since October 2015, due to new foreign exchange policies, there has been unavailability of the Dollar and lack of access to open letter of credit, this has forced marketers to stop product importation and impose over 90 percent supply on NNPC contrary to previous times, causing long months of fuel scarcity.
In the wake of these new policies, I have outlined some advantages and disadvantages of fuel subsidy removal on the Nigerian economy, which I’ve listed below.
Advantages of Fuel Subsidy Removal in Nigeria
- This new pump price will hopefully resolve the recurrent fuel scarcity crisis by ensuring availability of products as marketers will now be able to import product to the fullest capacity without government restrictions on import approval.
- It will also help reduce hoarding, smuggling and diversion of petroleum products and help ensure product price and free market stability through private sector participation.
- It will stabilize the labour market, enabling employment creation through new investments in private refineries, oil retailing, and loss of excess crude via gas flaring.
- It will ensure competition in the industry and market forces which will drive down the price of petrol in the long run as witnessed in the telecoms sector.
- Improvement in the power sector: The current fuel price will lead to the research for cheaper power generation alternatives, in time this will reduce the overdependence on Discos, increase competition and help generate economy.
- Increase in government interests in other sectors: The subsidy removal will give government access to more funds for development of other sectors such as education, health, employment, transportation, etc.
But, of course, there’s bound to be disadvantages, especially on the other sectors of the economy.
Disadvantages of Fuel Subsidy Removal in Nigeria
- Increased Cost Of Living: With the price of premium motor spirit (PMS) increased; the economy will face a sudden surge of inflation. Inflation is defined as a general and progressive increase in prices for goods and services. As inflation rate sets in, more Naira will purchase fewer goods causing depreciation in its value. Just recently, a loaf of bread worth N300 now costs N450, a small tin of rice worth N70 is now N100, etc.
- Increase in transport cost: Transportation cost has gone up as much as 300 per cent since the N145/litre increase. This increase has caused a ripple effect on other sectors of the economy which revolve around transportation.
- Increase in the cost of small scale business services: These businesses depend on subsidized fuel to render services, as public electricity supply from PHCN is not reliable and recently expensive.
- Increase cost of production: Factories and industries that depend on petroleum products and goods transportation will experience some difficulty and have to increase production costs, in other to meet market demands.
- Customer abuse: A monopoly in the free market could lead to customer rip-off, marketers can choose to create petrol product prices at will, just like the telecommunication sector. Hence the government needs to empower the Regulatory bodies to help control such abuses.
Removal of Fuel subsidy is a difficult topic, especially with the masses, most people don’t understand, and need to be educated on such serious economic issues about its pros and cons. Nigeria is in dire need of economic policies that will improve its sustenance and growth as a strong African economy. I do hope it is a worthy and yielding in the long run.