Subsidy: To remove or not to remove
Analyst View

So let us have a discussion”, said, an analyst.


What do you think about fuel subsidy?


To answer this, first of all, what is Fuel Subsidy?


Fuel subsidy as we know is the monetary assistance granted by the federal government to oil marketers to support low and stable fuel prices. Although the landing cost of petrol is currently at about N205/litre, the benchmarked price at which petrol (PMS) is sold in Nigeria is N145/litre (US$0.44/litre); the government pays the differentials in these prices in a bid to alleviate the burden on the public. Sounds good, right? Yeah!

We can confidently say that removing fuel subsidy may have negative spiral effects on the consumption patterns of economic units but in the long term, Is it not worth it? 


With the recent growth pattern of the Nigerian economy, we see that the country is recovering slowly from the 2016 recession. Recently, we were termed “Poverty Centre of the World” as the country has, in absolute terms, the highest number of people living in extreme poverty. At this moment, aside slightly increased tax revenue, we are yet to see major improvements in revenue generation in the non-oil sector.


The government is chiefly obligated to tackle the incidence of poverty and address the prevalent infrastructural deficit but the same government still burdens itself with payment of fuel subsidy.

Ibe Kachikwu, Minister of State for Petroleum Resources, said subsidies for petrol cost Nigeria US$65bn between 2011 and 2015. In addition, a recent report by BudgIT, a public finance focused Non-Governmental Organisation, has shown that the government has spent about N10trillion on subsidy between 2006 and 2018. 


“…yet we imagine what will happen if the government decides to remove subsidy, in simple words, things will be bad. However, subsidy should have been removed a long time ago when things were terribly bad (referring to 2016) and then we try to build the economy from there but now everything is getting worse than before even with fuel being subsidized.”


Taking a cursory look at the economy, the major problem of Nigeria seems to be revenue and not really debt. The reason for this is that Debt to GDP is at acceptable levels. Although analysts tend to focus more on debt service to revenue ratio, the question we should ask is, if debt to GDP is at acceptable and low levels, why then is debt service to revenue at high levels? The answer is: Revenue is too low. 


Nigeria needs more revenue, and subsidy alongside debt servicing is taking a large chunk of the country’s revenue. The opportunity cost of paying subsidy is getting too high as Nigeria’s fuel subsidy continues to crowd out other development spending. You may take this read for a better picture.

“…moreover, barely any country has developed without the people ‘paying for it’ in a way or the other. Removal of oil subsidy will lead to increase in fuel pump prices, cost of production will also increase and thus filter into prices of goods and services but in the long term, it will pay off.”


Removal of subsidy will free up enormous resources for infrastructure development, which will directly foster increase in Foreign Direct Investment (FDI) inflows.


We highlight that Nigeria’s total allocation for education and health care are at abysmal levels and below global standards. Power generation also remains unacceptably poor, we are convinced that the ‘subsidy money’ could help to address some of these issues.


“…another problem with fuel subsidy is who are the real beneficiaries? It appears as though Nigerians do not enjoy the full benefits of subsidy as marketers export these fuels to neighboring countries to enjoy higher profit margin due to relatively higher prices there rather than sell at the regulated price in Nigeria.”


Major fuel marketers may not be selling all the fuel available to the Nigeria market hence, some of these marketers, after enjoying the benefits of subsidy also smuggle these products out of the country; this may be one of the factors that leads to fuel scarcity.


Talking about fuel pump prices, the petrol pump price in Nigeria is one of the lowest in the world despite the fact that we are importing, we think this may be alluding that we are not doing something right. In Angola, pump prices go for US$0.52/litre, Saudi Arabia US$0.54/litre, USA US$0.80/litre, Global average US$0.68/litre (approximately N247/litre). Maybe fuel pump price are actually supposed to be high, and we should embrace it.


With all these, we are led to believe that the removal of fuel subsidy may be a better option than keeping it and the completion of Dangote refinery in 2020 presents the government an avenue to remove this burden. Lastly, we will not be doing justice if we did not mention that, Nigeria’s subsidy strategy suggests that the country may be adopting non-transparent practices that are creating numerous controversies as well as huge fiscal losses. 


At this point, we will like to continue our tasks at our respective working points.