There are over 40 countries worldwide that subsidize fossil fuel consumption according to the International Energy Agency (IEA) 2020, and the rising global oil prices compounded by the war in Ukraine raise important concerns about maintaining this fiscal expenditure.
In Nigeria, the government spent $4.5 billion (about 2 percent of its Gross Domestic Product-GDP) to subsidize petrol in 2021. This amount expended, according to the World Bank exceeds the government’s spending on health, education, and social protection. Without a doubt, finding a solution to Nigeria’s subsidy problem will have a positive pass-through effect on the federal government’s public finance.
According to the Nigeria Development Update (NDU) report from the World Bank in June 2022, fuel subsidies typically benefit richer households more than poorer households; making them regressive, and offsetting the government’s spending on pro-poor causes. What this means is that the government’s expenses to reduce fuel prices in Nigeria benefit the poor the least.
Also, according to analysts at Chapel Hill Denham Securities, the Nigerian government subsidizes foreign consumers of petrol. These analysts stated that only 40.6 million liters out of the 56.44 million liters of NNPC’s estimated daily PMS consumption are consumed by Nigerians, with the balanced being smuggled to neighboring African countries.
This smuggling activity flourishes on the back of the arbitrage opportunity created by relatively cheaper petrol in Nigeria, as Nigerians pay one of the lowest prices for petrol in the world. According to Global Petrol Prices, Nigerians pay the eighth-lowest petrol price in the world.
It is therefore evident that the petrol subsidy disproportionately benefits richer Nigerians, and the potential benefits of removing it are clear, Yet the government’s attempts to reform the subsidized fuel regime have practically faced strong resistance from the public and have often caused the government to retrogress.
For Nigerians, trading off fuel subsidies for other pro-poor investments such as health, education, and social protection, despite having more benefits for the poor seems to be downplayed. This resistance to fuel subsidy removal is perhaps because the people do not really understand its benefit or that they do not trust the government enough to compensate them for their welfare loss with the potential fiscal savings.
Taking a Closer Look at the Nigerian Business Environment.
The spike in the global commodity market stemming from supply chain disruption and the war in Ukraine has caused the price of oil to rise. This up-tick in oil price is expected to have a windfall benefit to a major oil-exporting country like Nigeria however, the economic outlook for Nigeria is still challenging as rising oil prices also means a rising cost of importing refined oil products and an increased subsidy cost. Also, exchange rate premiums in the official and black markets partly erode the potential impact of rising government revenue.
According to the World Bank, there is an increasing urgency to do business unusual in Nigeria. This therefore means an increasing need to divert the subsidy expenditure to other pro-poor infrastructural spending such as health, education, social protection, and so on. However, without countervailing measures, subsidy removal may exacerbate inflationary pressures and cause poor and vulnerable Nigerians to still suffer in the short run.
Nevertheless, we believe the Nigerian economy can even reap a multitude of benefits from subsidy removal, ranging from improved oil export proceeds to better pro-poor capital expenditure spending and a permanent solution to the incessant fuel crises in the country.
