Nigeria has recently announced plans to remove its consumer fuel subsidy. While this decision presents opportunities for redirecting the subsidy funds towards enhancing other sectors of the economy and potentially reducing carbon emissions, it is important to acknowledge that without additional support, this removal could potentially exacerbate inequality and impose economic burdens on Nigeria’s population.
In his inauguration speech, the new president of Nigeria, Bola Ahmed Tinubu, announced the total removal of consumer fossil fuel subsidies. He expressed concern that the subsidy scheme was increasingly favouring the wealthy population at the expense of the poor masses and stressed that the subsidy’s escalating costs could no longer be justified.
Fossil fuel subsidies are typically measures that are either aimed at reducing the expenses associated with fossil fuel energy production or reducing the amount that is usually paid by domestic energy consumers. In Nigeria, fuel subsidies exist because the government fixes the price of petrol for consumers below the international price and uses government resources to pay the difference.
Nigeria’s oil is mainly refined in Europe and then imported back into the country – the reason being that Nigeria’s three major refineries are grossly moribund. Therefore, the price of importation (which is mostly determined by international market forces) is typically deemed to be higher than any national prices assuming the products were to be refined within Nigeria. This explains why the expenses linked to the petrol subsidy have been considered by the Nigerian government to be no longer workable.
Shortly after the announcement that the subsidy would be removed, the state oil company – the Nigerian National Petroleum Company (NNPC) – increased the price of petrol by 200%, from N189 per litre to N570, triggering an escalation in the prices of consumer goods and services within Nigeria. Many citizens expressed their discontent and frustration, lamenting the implications of these changes. The government has attempted to promote the potential benefits of eliminating the fossil fuel subsidy including increased resources for investments in public infrastructure, education, and healthcare.
The prevailing global perspective suggests that maintaining fuel subsidies often results in inefficiencies and financial leakages. Consequently, there is a growing consensus that all nations must ultimately eliminate fossil fuel subsidies to fulfil their international obligations, particularly in the context of the climate crisis.
There is a mounting body of evidence that fossil fuel subsidies lead to increased greenhouse gas emissions, contributing to climate change and eco-anxiety globally. Nigeria has made some progress in curbing carbon emissions through notable initiatives, particularly in the field of solar energy. However, it is important to acknowledge that Nigeria’s plans for sustainability are still evolving and await complete realisation.
The amount spent on the fuel subsidy has fluctuated in recent years as reports seem to suggest that the amount roughly budgeted in recent times up to the year 2023 is a staggering US$1.2 billion a month. These figures are reported to surpass the government’s expenditure on education, health, and infrastructure during the respective periods examined.
Nonetheless, despite the apparent agreement among the elite regarding the need to remove the subsidies, it is imperative to approach this move with political caution and precision, particularly in the context of a developing nation like Nigeria. If poorly handled, consumer fossil fuel subsidy reform or removal can disproportionately impact vulnerable households, trigger social unrest, and cause profound inequality.
History and realities of fuel subsidies in Nigeria
Since the 1970s, Nigeria has implemented a fuel subsidy programme, initially aimed at mitigating the effects of rising global oil prices on its citizens. This initiative involved the government consistently selling petrol to Nigerians at below-cost prices.
After the enactment of the Price Control Act in 1977, fuel subsidies became institutionalised in Nigeria, leading to the establishment of regulated prices for certain products, including petrol. This legislation made it unlawful to sell these products above the prescribed price.
If poorly handled, consumer fossil fuel subsidy reform or removal can disproportionately impact vulnerable households, trigger social unrest, and cause profound inequality.
The Price Control Act was introduced during the regime of the former military head of state, Olusegun Obasanjo, as a response to the global “Great Inflation” era of the 1970s, which was characterised by a significant increase in energy prices worldwide. The purpose of this law was to mitigate the impact of rising energy costs and provide a cushioning effect on the Nigerian economy. Although the objective of this law was achieved, however, and as evidence now suggests, these measures cannot be sustained financially. This is besides the huge negative environmental implications of the fuel subsidy scheme.
Tread with care
The Nigerian government appears determined to proceed with its policy of removing the fuel subsidy. However, it is important that this decision is implemented in a manner that does not compromise the ability of low-income individuals to access an acceptable standard of living. Therefore, to ensure a fair transition, it is imperative that the removal of the subsidy is accompanied by the provision of adequate social safety nets and protective measures, and undertaken with diplomacy.
The Nigerian government should prioritise a complete understanding of the socio-economic conditions in communities that are and will be subsequently affected by the subsidy removal and related reforms. This will involve conducting a thorough analysis of the levels of subsidy support that were provided and examining the distributional impacts associated with its withdrawal.
This drive can be partly achieved by exploring the Fossil Fuel Subsidy Reform simulator that aims to assist policymakers in understanding and visualising the significant potential of reallocating funds that are currently spent on fossil fuel subsidies. The simulator operates as a dynamic and interactive platform that allows policymakers to explore different scenarios and evaluate the impact of removing fossil fuel subsidies. It provides a comprehensive understanding of the financial, social, and environmental implications associated with subsidy reinvestment.
In the same vein, the government should conduct a thorough examination of the cost of governance, which is widely considered to be unreasonably high. Drastic reductions should be implemented to free up more resources that can be effectively utilised for development purposes.
The government must seek to ensure consistent social and political support for the fuel price reforms and subsidy removal. The fossil fuel subsidy reforms should incorporate compensatory measures specifically designed to support the poorest and most impacted households, which may involve establishing social safety nets. These reforms should concentrate on strengthening the existing social welfare benefits, such as implementing cash transfer mechanisms and temporary basic income initiatives to mitigate the increase in fuel prices.
The fossil fuel subsidy reforms should incorporate compensatory measures specifically designed to support the poorest and most impacted households.
The government should engage in effective public communication and foster deep stakeholder engagement to gain widespread support across the society and the different sectors. Clear explanations and demonstration of the environmental effectiveness and equitable distributional impacts of the reform will help secure public confidence. One crucial and potential element of success is building consensus around key approaches in the implementation of the reforms. This may require close collaboration with experts and opinion leaders alike. Careful handling of the removal of Nigeria’s consumer fossil fuel subsidy is crucial to avoid disproportionate impacts, social unrest, and exacerbating inequality.