By Uchechukwu Eke, Ph.D.

Governments often implement energy subsidies as a means to alleviate the burden of high energy costs on the vulnerable populations. These subsidies aim to ensure access to affordable energy, promote social equity, and foster economic development.  Literature is full of various types of energy subsidies around the world his was the case in Nigeria when in the early 1970s, high fuel prices compelled government to introduced fuel subsidy. There are record of various types of energy subsidies in both the developed and developing nations around the world.

In the Nigerian case, it was not long after its introduction that government began to have a rethink about the fuel subsidy regime.  The idea first started by way of increases in the prices of petroleum products, with the Administration of then President Babangida increasing pump prices four times between March 1986 and March 1991. The first attempt at full scale removal of fuel subsidy occurred in the year 2000, under the administration of then President Obasanjo. The administration argued then, that it cost the government about $2 billion to subsidies fuel prices annually.

Since the first attempt, the removal of fuel subsidies continued to remain a contentious issue in Nigeria, sparking debates and discussions among both the government and citizens. The subsidy removal, which the government claimed was aimed at reducing the financial strain on the government and encouraging economic growth, faced mixed reactions from various stakeholders. In this article, we will examine the arguments presented by the government and citizens in retrospect, shedding light on their perspectives and concerns.

Government’s Arguments for Fuel Subsidy Removal

Government’s arguments for fuel subsidy removal were mainly driven by economic considerations. The four strong arguments put forward, revolved around fiscal responsibility, economic growth, wasteful consumption and corruption mitigation.

Fiscal Responsibility: The Nigerian government argues that the removal of fuel subsidies is a necessary step towards fiscal responsibility. Subsidies place a significant burden on the national budget, diverting funds that could be allocated to critical sectors such as healthcare, education, and infrastructure development. The removal will allow the government to reallocate resources and address pressing economic challenges.

Economic Growth: Proponents of subsidy removal argue that it stimulates economic growth and attracts foreign investment. They argue that by eliminating subsidies, the government can create a more favorable investment climate, reduce wasteful consumption, and redirect resources towards productive sectors. This, in turn, can lead to job creation, increased revenue generation, and overall economic development.

Encouragement of wasteful consumption patterns: Fuel subsidies often lead to wasteful consumption habits, as artificially low fuel prices incentivize excessive energy usage. This results in higher energy demands, putting additional stress on the already strained fuel supply system. With the removal of subsidies, consumers may be motivated to adopt energy-efficient practices, thereby reducing the burden on the fuel supply system.

Corruption Mitigation: Fuel subsidies have been prone to corruption and mismanagement in Nigeria. Government officials argue that removing subsidies reduces the opportunities for corruption and embezzlement, as it eliminates the need for subsidy-related transactions and creates a more transparent system for the distribution and pricing of petroleum products.

Citizens’ Arguments against Fuel Subsidy Removal

Understandably, the citizens’ arguments had a lot to do with the economic and social consequences of fuel subsidy removal. The citizens were of the opinion that fuel subsidy removal would lead to high cost of fuel, with attendant multiplier negative effects, particularly where the country suffered from underdeveloped public transport systems and a heavy reliance on fuel-powered private power generators for electricity.

Increased Transportation Expenses: Citizens expressed concern over the underdeveloped state of public infrastructure, particularly in the areas of transportation and power supply. In the absence of reliable and affordable public transport options, people are compelled to rely on private vehicles or commercial transport services, thereby incurring higher fuel expenses. This places a financial burden on individuals and reduces their disposable income, potentially affecting their purchasing power and overall economic well-being.

 Rising Production and Operational Costs: Industries are heavily reliant on fuel-powered private power generators and face escalating production and operational costs as a result of the absence of reliable public power supply. High fuel costs increase their operational expenses, reducing profitability and hindering business growth. This situation is particularly challenging for small and medium-sized enterprises (SMEs) with limited resources.

Inflationary Pressure: High fuel costs can trigger inflationary pressures within the economy. As transportation costs rise, businesses pass on the increased expenses to consumers by raising prices on goods and services. This, in turn, affects the cost of living and reduces the purchasing power of individuals, especially those with lower incomes.

Inadequate Mobility Options: High fuel costs, coupled with underdeveloped public transport systems, limit the mobility options available to individuals, particularly those with lower incomes. The lack of affordable and reliable public transportation hampers their access to essential services such as education, healthcare, and employment opportunities. This exacerbates social inequality and restricts social mobility.

Increased Cost of Living: One of the main concerns raised by citizens is the immediate and direct impact on the cost of living. With subsidy removal, fuel prices tend to rise, leading to increased transportation costs, higher food prices, and overall inflation. Citizens argue that these effects disproportionately affect low-income individuals and exacerbate poverty levels, making basic necessities less affordable.

Poor Governance and Transparency: The citizens argued that  government was known know to be transparent in the oil industry, hence  doubted that the management of the revenue recoveries from subsidy removal will be judiciously deployed for the public good as a result of widespread corruption. They argued that poor management of subsidy regime-removal of subsidy as a result of poor management will amount to throwing the baby away with the bath water.

Citizens Proposed Impact Mitigating Measures

In the light of the forgoing negative impacts of subsidy removal, the citizens urged the government to take some remedial actions to mitigate the expected negative impacts of fuel subsidy removal before ever implementing policy.

Implement Social Safety Nets: Citizens urged the government to implement adequate social safety nets to cushion the impact on vulnerable populations. They argued that the removal of subsidies should be accompanied by targeted measures to protect the most economically disadvantaged, such as implementing welfare programs, improving healthcare services, and supporting job creation initiatives.

Expand Public Transportation Infrastructure:. They argue that before removing fuel subsidies, the government should focus on improving public transport systems by investing in and improving public transportation infrastructure to offer affordable and efficient mass transit alternatives to private cars and minibuses. This can reduce the overall demand for fuel and encourage the use of more sustainable transport options. Energy Efficiency Programs:

Expansion of Public Power Supply Infrastructure: Providing reliable electricity, and investing in alternative energy sources. Without these improvements, the removal of subsidies would place an additional burden on citizens who rely on private generators.

Launch Energy Efficiency Programme: Launch energy efficiency programs to reduce fuel consumption in various sectors. This could include promoting energy-efficient appliances, industrial practices, and transportation methods.

Address Governance and Transparency: citizens argued that the government should address issues such as fuel smuggling, inefficient refinery operations, and petroleum sector reforms before removing subsidies. Without addressing these underlying issues, they question the effectiveness of subsidy removal in achieving its intended goals.

Expand Refining Capacity: Citizens opined that as an oil producing country, the government should expand the refining capacity of the country by, building new refineries as well as repairing and maintain the old ones.

Adopt Gradual Subsidy Phase-out: Instead of abrupt removal, governments should consider a phased approach to subsidy removal. This allows for smoother transitions and gives time for individuals and industries to adapt. The gradual removal of subsidies can be accompanied by awareness campaigns that educate the public about the importance of sustainable energy practices.

End of Subsidy Regime

The arguments surrounding fuel subsidy removal in Nigeria reflect a complex and multifaceted issue. While the government emphasized fiscal responsibility, economic growth, and corruption mitigation, citizens voiced concerns regarding increased cost of living, lack of social safety nets, inadequate public infrastructure, and governance transparency. Balancing these perspectives was crucial for policymakers to develop comprehensive solutions that address the challenges associated with subsidy removal while safeguarding the interests of the citizens.

On May 29^th President Tinubu pronounced the end of the fuel subsidy regime. Expectedly fuel prices went up, first from below two hundred Naira to above five hundred Naira and later to above six hundred Naira. This triggered increases in the prices of goods and services as never before. Citizens’ discontent at the consequent economic dislocation highlighted by soaring inflation, is an indication that the perspectives of the citizens were never factored in and that deliberate actions were not taken by previous and present governments to mitigate the inherent negative impacts of the no-subsidy policy. Constructive dialogue, stakeholder engagement, and evidence-based policy formulation would have contributed to a more inclusive and sustainable approach to fuel subsidy management in Nigeria.

Post-Subsidy Impact Mitigating Measures

Now that subsidy has been removed, without the citizens’ perspectives and the pervasive negatives impacts have manifested, all hopes are not lost. There are still opportunities for certain post-subsidy measures to be taken to reduce the negative impacts, in the short to long term:

Invest in Urban Bus Mass Transit Buses/ Incentive Private Inter-State Transport Operators: Government at all levels should through their ministries of transport immediately purchase and put into service mass transit buses to provide affordable and efficient urban transit services as alternatives to cars and to reduce  high cost of transportation for urban dwellers. For inter-state transportation, the federal government should incentive reputable private transport operators by way of subsidies, tax breaks, grants, loans, etc. to purchase mass transit vehicles for the purpose of expanding their fleet and routs. This will enable the operators lower the initial and operational costs of acquiring and maintaining more buses.

Reallocate Subsidy Funds: Governments should consider redirecting the funds previously allocated for fuel subsidies towards the improvement of power and transport infrastructure. By investing in sustainable energy sources, upgrading power grids, and expanding public transport networks, to enable the efficient and affordable transportation of people and materials

Implement Energy Conservation Measures: Promoting energy conservation initiatives is crucial. Encouraging individuals and industries to adopt energy-efficient practices can help reduce the strain on power infrastructure and mitigate the negative impacts of subsidy removal.

Foster Public-Private Partnerships: Governments can engage in partnerships with private entities to facilitate the development and maintenance of power and transport infrastructure. These collaborations can leverage private sector expertise, technology, and funding to accelerate infrastructure projects.

Incentives Uptake of Solar Power: Providing tax credits or subsidies for solar power equipment purchases or installations, either for residential or commercial customers, or both.

Launch Energy Efficiency Programs: Launch energy efficiency programs to reduce fuel consumption in various sectors. This could include promoting energy-efficient appliances, industrial practices, and transportation methods.

Privatize Refineries: Immediate privatization of the refineries to make them operationally efficient and to compliment the Dangote refinery when it comes on stream, and by so doing, end refined petroleum products importation.  It must also be noted that going forward, it will become more difficult for Nigeria to find refineries abroad from which to import and the prices will also continue to increase as the developed nations make progress in their energy transition plan. The energy transition is expected to reduce the demand for refined products, as more vehicles switch to electric or hybrid modes, resulting in lower refining margins. This may lead to the closure of some refineries or such refineries may be forced to reconfigure their processes to produce more of the non-fuel products or the total conversion of them to produce other products, such as biofuels or hydrogen.

 

Uchechukwu Eke, Ph.D is  the author of this Energy article.

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