FUEL SUBSIDY REMOVAL 101

*Chiwendu Obed

Image Credit: The Guardian Nigeria

Let’s say the price of your favourite candy is normally N600, but whenever you go to the store, you only pay N200. The remaining N400 is covered by your generous parents, which can be seen as a subsidy, resulting in the subsidised price of N200 that you pay.

One day, your parents inform you that they would like to allocate that N400 towards your education fund instead of paying for your candy. As a result, you will now have to pay the full price of N600 every time you purchase the candy.

In its simplest form, a subsidy refers to a sum of money provided by the government or a public entity to help an industry or business maintain low prices for a particular commodity or service.

FUEL SUBSIDY IN NIGERIA

During the inauguration of the newly elected President of the Federal Republic of Nigeria, His Excellency, Bola Ahmed Tinubu, a pronouncement on the complete removal of fuel subsidy was made by him. There was an immediate panic reaction from fuel marketers and citizens. On the 31st of May, 2023, the Nigerian National Petroleum Company Limited (NNPCL) released a new fuel price regime which pegged fuel prices ranging from 488 per litre to 557 per litre. This reinforced the end of fuel subsidy in Nigeria.

There has been a consistent rise in petrol price since 2015, and vast sums of money has been spent on subsidising the price of petrol that Nigerians buy. A massive N2.09 trillion was spent on petrol subsidies in 2020 and N1.57 trillion in 2021. In the first half of 2022, Nigeria spent N2.91 trillion ($7 billion) on petrol subsidy. By the end of 2022, almost $16 billion was estimated for the fuel subsidy budget in Nigeria. This is double the total budget of all thirty-six state governments in 2021 ($9.8 billion). The Federal Government, at the beginning of the year, only placed a N3.3 trillion budget to cover the subsidy for the first half of the year.

WHY WOULD REMOVAL OF FUEL SUBSIDY AFFECT ALL?

Nigerians heavily depend on diesel generators to generate power due to the huge energy gap in the country. According to the IRENA 2023 Report, 84% of urban households use backup power supply systems such as fossil diesel or gasoline generators, while 86% of the companies in Nigeria own or share a generator.

For companies and industries (C&I), diesel and gasoline generators are used to maintain infrastructure and equipment. The Rural Electrification Agency (REA) of Nigeria has also relayed that Nigerians and their businesses spend almost $14 billion annually on electricity generation that is expensive ($0.40/kWh or more), of poor quality, noisy, and polluting.

An increase in fuel prices would increase the transport and maintenance costs of running a business. All these are the running costs of business (overhead), and they are inferred in the overall retail pricing. For households, an increase in fuel prices would translate to an automatic increase in the cost of living; ranging from transportation prices, food prices, logistics services, travel, amongst other expenses. Therefore, The concerns raised by the majority of the public regarding the sudden removal of the subsidy are valid in themselves, as the current inflation rate is. causing financial hardship for most people.

The interconnected nature of the economy means that an increase in the cost of living, particularly due to rising prices of common goods, can have a significant impact on various sectors. This leads to adjustments in service rates as providers strive to navigate the economic landscape and ensure their continued operation.

BENEFITS OF FUEL SUBSIDY REMOVAL

While the many disadvantages that a removal of subsidy would bring to Nigerians have been highlighted, there are still some benefits to expect for the country as a whole. The money saved from subsidy removal is expected by all to be reinvested in other sectors. There are a lot of sectors in the country that need urgent attention, including the transport system, energy access, the health sector, insurance, education and several others.

Therefore, where we cannot exactly reverse the decision however discomforting it would be on the citizens, measures should be put in place to have Nigerians accommodate the change that has come. Some of these measures should include:

1. Increase in minimum wage

As unlikely as this may seem, the pre-subsidy removal working income is unsustainable under post-subsidy removal conditions. The current minimum wage in Nigeria sits at 30,000, which is undeniably insufficient to meet the cost of living in the country. With the inflation rate rising to 22.22%, this marks the third consecutive increase in 2023. It is expected that this rise will continue, leading to even greater hardships. In light of the changes in the cost of living, it is evident that an increase in the minimum wage would be highly appropriate and necessary.

2. Enhance infrastructure

The development of robust infrastructure in Nigeria will significantly boost manufacturing activities and help reduce the cost of doing business. Additionally, the establishment of functional refineries within the country would enable local fuel refining, leading to a reduction and eventual elimination of fuel imports. This, in turn, would foster the growth of a comprehensive value chain in the country’s fuel production sector.

3. Mode shift to efficient transport system

Nigerians heavily rely on fossil fuels to power nearly all aspects of infrastructure, including electricity, vehicles, machinery, and more. Therefore, it is imperative that we explore the potential of alternatives to fossil fuel energy, vehicles and off-grid technologies. While the country is still in the process of adapting to electric vehicles and compressed natural gas (CNG) in the transportation sector, the recent pilot phase launch of electric mass transit by Oando in Lagos state is a promising step forward. Although the current availability may not be sufficient to meet the demand, the government should actively facilitate the adoption of electric public transportation and reserve space for its future expansion. Generally, the adoption of efficient transportation systems, such as mass transit buses and train systems, based on well-developed infrastructure, would not only alleviate the transportation cost burden but also facilitate the movement of larger numbers of people and goods simultaneously. This would result in improved efficiency and convenience for commuters and businesses alike.

CONCLUSION

In a country where heavy reliance on fossil fuels is necessitated by energy poverty and insufficient infrastructure, it is reasonable to anticipate that improvements in the primary power generation source would lead to a corresponding rise in purchasing power and eventually, increase in the cost of living. Without the implementation of appropriate infrastructure to address the persistent issue of unreliable power supply, significant challenges are expected to persist.

Despite the announcement to remove the subsidy on fuel made, November 2021, 18 months ago, no discernible efforts have been undertaken by the federal government to provide alternatives and solutions or alleviate the potential hardships faced by the population. To effectively address the current increase in the cost of living resulting from fuel subsidy removal, it is crucial to prioritise and promote sustainable alternatives. By implementing and encouraging sustainable practices and solutions, we can mitigate the impact of the cost of living rise and ensure long-term economic and environmental stability.

Chiwendu Obed is Junior Associate, Energy Access at Clean Technology Hub.