The Conversation on Fuel Subsidy Removal: Effects on the Nigerian Economy
Updated: Jun 8
Subsidy exists when the government helps the consumers of a particular product to pay the price lower than the prevailing market price of that commodity. A subsidy is defined as any government policy intended to lower the price of a good or service consumers pay compared to the cost in the absence of the policy. Government pricing controls on products and services allow people with limited purchasing power to pay for them. Subsidies are government policies aimed at making consumer goods and services available and accessible to people with low incomes. It is a form of market manipulation whereby the government fixes the price of the interest below its actual market value and pays the retailer the difference. In this instance, the government sets the fuel cost at the pump lower than the actual market price and pays the importers and marketers the difference.
Despite its purported benefits, the subsidy is never an effective policy tool since it may result in an inefficient resource allocation, especially if the price is below the marginal cost of production. The drop in crude oil prices on the world market contributes to declining government revenue. As the country's population grows and fuel demand rises, fuel subsidization costs also rise, and the Nigerian government cannot sustain paying fuel subsidies. Government spending on subsidies increased from $8 billion in 2011 to N462 billion in 2019 and N417 billion in 2020. This indicates that fuel subsidies comprise about 30% of government spending, crowding other development spending in Nigeria.
International institutions, such as the International Monetary Fund (IMF), have advocated for eliminating petroleum product subsidies because they cause price distortions that prevent them from accurately reflecting market costs (Okwanya, Ogbu, & Pristine, 2015). They further went on to claim that because of subsidy, the subsidized product is used carelessly.
The Effect of Fuel Subsidy Removal on the Nigerian Economy
Eliminating fuel subsidies has long been an issue of contention in Nigeria. The Nigerian government has been providing fuel subsidies to keep the fuel price at the pump low for the public. The government has repeatedly tried to end this subsidy, but it has had detrimental economic effects. Despite being targeted at the disadvantaged, fuel subsidies only directly benefit the wealthy, with the poor only receiving an aftereffect.
Refusing fuel subsidies will worsen the suffering that most Nigerians living in poverty already face. For the underprivileged in Nigeria, it will have highly detrimental effects. When subsidies are eliminated, transportation costs will increase, food prices will soar, and other related goods will rise. At the same time, household incomes in some households with no significant source of livelihood stay the same. This would further cause a decline in the increased revenue of impoverished families, raising the amount of poverty in the nation and exacerbating the already intolerable economic suffering in society and the already low standard of living of the populace. Fuel drives Nigeria's manufacturing and production industry for production or distribution. Hence a rise in petrol pump prices will also increase production costs. Increased manufacturing costs that are passed along to consumers as high prices will have a knock-on effect on the price of goods and services, raising the cost of living due to the rise in fuel prices. Social unrest may result from eliminating fuel subsidies, mainly if the government doesn't take further action to lessen the impact on the populace. Strikes and protests may take place, disrupting business operations.
The elimination of fuel subsidies will benefit Nigerians by promoting economic growth. The vast sum of money previously used to pay for subsidies will be made available to the government for the development of the nation's desperately needed infrastructure, particularly in the fields of transportation, education, and health care. Every citizen of the country will benefit if this is done. Deregulating the downstream oil industry will bring private capital, particularly foreign direct investments. Investors haven't been drawn to the industry up until now because they're concerned they won't be able to repay their investment at government-controlled prices. In addition to providing many unemployed Nigerians with work possibilities, foreign direct investment in the sector will generate government revenue through taxes and levies. The importation of products and machines will be made simple by the availability of foreign exchange. Eliminating fuel subsidies will also aid in reducing market inefficiencies. It will stop the smuggling of petroleum products into nearby nations. Fuels earmarked for domestic consumption in Nigeria are smuggled across borders to be sold at higher rates, creating government shortages due to neighboring countries' higher petroleum product costs.
According to the former Central Bank of Nigeria governor and former emir of Kano Sanusi Lamido Sanusi, who listed the advantages of eliminating fuel subsidies (Onwuamaeze & Ekeghe, 2020),  Nigeria is the only oil exporting nation that does not benefit from an increase in the price of crude oil on the world market because it sets the price of refined products that it does not produce. Therefore, whatever gains it makes from the high price of crude oil, it loses from the high price of refined imports. This is true because if crude oil prices rise, the cost of advanced goods will likewise increase elegant. Therefore, cutting off fuel subsidies will stop the Nigerian government from having such income losses.
Conclusion and Recommendation
Fuel subsidy withdrawal has favorable and unfavorable consequences for the Nigerian economy. The withdrawal of fuel subsidies, which comprise a sizable component of government spending, will ease the government's financial load and reduce overall spending. The government can invest the money saved in crucial industries like infrastructure, health, and education. Eliminating fuel subsidies will promote the development of renewable energy sources like solar, wind, and hydropower, reducing the nation's reliance on fossil fuels and promoting sustainable energy sources. It will also encourage private sector participation, increasing market competition, driving down prices, and improving service delivery. Without alternative measures to mitigate its adverse effects, including but not limited to increased living costs, inflation, and social unrest, the repercussions will fall disproportionately on the nation's poor, resulting in greater inequality. Therefore, the government must put measures in place to lessen the effects of the loss of fuel subsidies, such as offering alternative energy sources, enhancing social welfare programs, and investing in vital economic areas.
References  Umeji George, Eleanya, Edith Eberechukwu, (2021) Assessing the Impact of Fuel Subsidy Removal in Nigeria on the Poor in The Covid-19 Era. SSRN-id3830477.pdf  Okwuanya, I., Ogbu, M. & Pristine, J. M. (2015). An assessment of the impact of petroleum subsidy on consumer price index in Nigeria. Global Journal of Interdisciplinary Social Sciences, 4(1), 36-39  Onwuamaeze, D. & Ekeghe, N. (2020). Sanusi lists the benefits of petroleum subsidy removal, canvases structural reforms. Retrieved from www.thisdayonline.com