The recent decision by Nigeria Labour Congress to shelve its planned nationwide strike action over the removal of fuel subsidy has doused the palpable tension engulfing the country. The labour union seems to have chosen the path of dialogue with the federal government instead of the confrontational posture it earlier took in resolving the situation.
The subsidy on petroleum products in Nigeria has always been a contentious issue.
Historically, the subsidy has led to various complications, including corruption, artificially increased consumption, and reduced spending on other essential social services that could accelerate economic development.
Nigeria is known for its vast deposit of crude oil, with the resource serving as the main source of revenue for the government. However, the productivity of the oil sector has not translated into significant development in the country’s infrastructure and social services.
Therefore the proclamation by President Bola Ahmed Tinubu ending the subsidy regime during his May 29 inaugural address, even if poorly timed, was a bold move geared towards closing the chapter of Nigeria’s decades of self-inflicted subsidy malaise.
For now, the position of the government on subsidy removal is clear, going by the president’s pronouncements about the policy.
But ideally President Tinubu ought to have waited awhile until he has fully assumed office, settled down and studied the situation before making the pronouncement.
I strongly felt that the new government should have tarried a bit on the subsidy removal until all preparatory plans with various segments of government, including states and other stakeholders as well as the palliative measures were concluded. Obviously, there’s the need to discuss extensively with other stakeholders on the matter before arriving at any plan of action.
It will be recalled that the Petroleum Industry Act (PIA) signed into law on August 16, 2021 by former President Muhammadu Buhari provides for total deregulation of the downstream sector, which implies the removal of subsidy and enthronement of a free market regime for the sector.
However, in January 2022, the government kicked that section of the PIA aside and postponed subsidy removal to June 2023. The Buhari government cited the pains subsidy removal would bring on the poor and vulnerable masses as reason for its decision which gives the Tinubu administration something to appreciate going forward.
Here, I will seek to explore the dynamics of fuel subsidy removal in Nigeria from the viewpoint of social engineering, economic impact, and sustainability.
Firstly, social engineering implies the use of policies and programmes aimed at shaping the behavior and actions of individuals towards a desirable social outcome. The debate on the removal of fuel subsidy in the country has infused a social engineering dimension, particularly regarding the role of subsidy in social welfare and the consequences of its removal. Proponents of fuel subsidy believe that the removal of the subsidy will cause an increase in fuel prices, which it actually did at an astronomical rate – a situation that has significantly impacted the purchasing power of Nigerians. Now the 300% sudden hike in the petrol pump prices as a result of the subsidy removal has consequently led to a rise in the prices of basic commodities, including food, transportation, and so on. This situation has the potential to increase poverty in the country, which is already enduring high unemployment and economic inequality levels.
To buttress this argument, a Times report in 2021 found that over 40% of Nigerians live below the poverty line. This situation has the potential to get worse if the subsidy removal is not adequately managed. On the other hand, advocates of fuel subsidy removal argue that the existing subsidy system has been an avenue for elites in the country to enrich themselves, as they are the only ones benefiting from it, leaving the poor with no benefits. Studies have shown that, in reality, 60% of fuel subsidy benefits go to the richest 10% of the population, further buttressing the argument that fuel subsidy is regressive.
Additionally, the money spent on fuel subsidies, estimated at between $3-7 billion, according to a report by the Africa Research Institute, is unavailable for investments in education, healthcare, and other essential social services. The lack of development in public infrastructure in Nigeria has had a significant impact on social welfare. The underdevelopment of vital social structures translates to high out-of-pocket expenses for Nigerians when seeking essential services. In the long run, the removal of the subsidy has the potential to promote social welfare, as funds initially available for subsidy can be channeled towards investment in social infrastructure and essential services, which can directly benefit the population.
It’s worth noting that the potential economic impact of fuel subsidy removal in Nigeria has been a subject of many discussions. Successive governments had, over the years, attempted to address the ill effects of subsidy and reduce its impact on the economy. According to the World Bank, Nigeria’s fuel subsidy amount, which stood at $4.8 billion in 2012, represented a little over 20% of its revenue that same year. The high cost of fuel subsidy is, therefore, unsustainable in the long run and has a significant impact on the economy.
The advocates of fuel subsidy removal argue that the subsidy is detrimental to the growth of the country’s industries, as it promotes a culture of consumerism rather than investments in research, innovations and development. The federal government, through the Central Bank of Nigeria (CBN), made $41.9 billion available to fuel importers between 2010-2013, to alleviate debts incurred from the purchase of petroleum products from foreign markets. However, over the same period, manufacturing activity in the country accounted for only 6% of total GDP, a significant contrast to South Africa, where manufacturing accounts for nearly 30% of GDP. They further argued that removal of subsidy has the potential to encourage investment in local production, enable companies in Nigeria to compete with foreign producers, and increase local content production.
Some proponents of subsidy removal also pointed out that elimination of the fuel subsidy would cut the Nigerian National Petroleum Company’s operating budget by about18%, mitigating corruption and inefficiencies. Sanusi further adds that the savings can be channeled to infrastructure development, public services, and other areas that promote sustainable economic growth in the country.
Despite the potential benefits of removing fuel subsidies, the immediate economic effects of subsidy removal can be dramatic, leaving the population to bear the brunt of the policy decisions. Fuel price increases have often resulted in an increase in the prices of food, transportation, and other basic goods, affecting the purchasing power of citizens. This situation could lead to significant economic consequences, with implications for the country’s macroeconomic indicators such as inflation, unemployment, and recession.
Furthermore, the removal of fuel subsidies has a sustainability dimension, given the impact of the subsidy policy on the country’s environment, economic growth, and social welfare.
Moreover, sustainable development depends on the country’s ability to invest in alternative sources of energy, which could also create jobs and contribute to economic growth. However, Nigeria has a weak framework for promoting renewable energy sources. Thus, the abolition of fuel subsidies could provide the government with an incentive to invest in alternative energy sources, contributing to sustainable development.
Although the removal of subsidy risks immediate economic shocks, the long-term social and economic benefits are undeniable. The policy ensures that funds are channeled towards essential social services, promote local production, mitigate corruption within the system, and encourage investment in alternative sources of energy contributing to sustainable development.
Therefore, the federal government must implement the removal of the fuel subsidy in phases, giving room for effective strategies to address the potential adverse economic outcomes.
Finally, the government must ensure that funds recovered from subsidy removal are channelled towards investments in sustainable development, particularly in social infrastructure and renewable energy.