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Insight & Analysis - May 30, 2023

President Tinubu’s Removal of Fuel Subsidy: Benefits & Challenges

Nigeria, as one of the world’s largest producers of crude oil, faces the challenge of high fuel prices. This is linked to President Tinubu’s removal of fuel subsidy in the West African country. This is a decision that holds significant implications for the country’s economy.

The government’s longstanding policy of subsidising fuel prices has strained resources. However, the proposed removal of fuel subsidy by President Tinubu has the potential to bring about various benefits and challenges for the Nigerian economy.

Before we go into this, let’s examine how Nigeria’s fuel subsidy came to be and how it was supposed to function. 

Why fuel subsidy?

Nigeria’s fuel subsidy was introduced in 1973 as a way to control the price of fuel and make it more affordable for Nigerians. The subsidy was supposed to work by having the government pay the difference between the cost of importing fuel and the price at which it was sold to consumers. This meant that the government was effectively subsidizing the cost of fuel for Nigerians.

The subsidy has been controversial since its inception. Critics argue that it is a waste of money and that it benefits the rich more than the poor. They also opined that it encouraged corruption and inefficiency in the oil sector.

This was owing to the highly complex stages of activity involved in the subsidy process, the government’s challenge to bear the cost of supervising implementation, and the alleged rise of corruption in the system. 

Supporters of the subsidy argue that it is necessary to protect the poor from the high cost of fuel. They also argue that it helps to keep the economy running smoothly.

In recent years, the cost of the subsidy has become increasingly unsustainable. In 2012, the government spent N1.35 trillion on the subsidy, which was more than the entire budget for education. This led to calls for the subsidy to be removed.

In that year the Goodluck Jonathan-led government announced that it would be removing the subsidy. However, this decision was met with widespread protests and the government was forced to back down.

Benefits of Removing Fuel Subsidy

Increased government revenue

By eliminating the subsidy, the government would save billions of dollars annually. This substantial sum could then be redirected towards funding other critical programmes, such as education and healthcare, which are vital for the development and well-being of Nigerians.

Lower fuel prices

With the subsidy gone, the cost of fuel is likely to decrease. This reduction in fuel prices would provide relief to consumers and businesses, as transportation costs and operational expenses would be alleviated. It could stimulate economic growth by allowing businesses to operate more efficiently and facilitating increased spending power for individuals.

But how can this happen, with the removal of subsidy?

The first result of the removal of fuel subsidy can be increased fuel prices, but with proper planning this should improve. Here’s how fuel prices will fall following the removal of fuel subsidy. 

Increasing domestic production: Nigeria is a major oil producer, but it does not produce enough oil to meet its own needs. Increasing domestic production would help to reduce the country’s reliance on imported oil, which would lower the cost of fuel.

Improving efficiency: Nigeria’s oil sector is plagued by inefficiency. Improving efficiency would help to reduce the cost of producing oil, which would lower the cost of fuel.

Reducing corruption: Corruption is a major problem in Nigeria’s oil sector. Reducing corruption would help to ensure that the government gets the best possible price for its oil, which would lower the cost of fuel.

Investing in renewable energy: Nigeria has a lot of potential for renewable energy. Investing in renewable energy would help to reduce the country’s reliance on oil, which would lower the cost of fuel.

Greater investment in the oil and gas sector

The removal of fuel subsidy could attract greater investment in Nigeria’s oil and gas sector. Businesses, anticipating higher profitability without the burden of subsidising fuel prices, would be more likely to invest in the country’s oil and gas industry. This could lead to job creation, economic expansion, and overall development.

Challenges of Removing Fuel Subsidy

Despite the promising potential of fuel subsidy removal, it’ll not come without its challenges.

Potential for increased inflation

If fuel prices rise, the costs of goods and services across various sectors could also increase, leading to a decrease in the standard of living for some Nigerians. It is crucial for the government to carefully manage this aspect to minimise the impact on vulnerable populations.

Job losses

Some businesses, particularly those heavily reliant on affordable fuel, may struggle to sustain their operations if the cost of fuel rises. This could result in layoffs and unemployment, adversely affecting the workforce and the overall economy.

Social unrest and protests

The removal of fuel subsidy could trigger public discontent, leading to protests and social unrest. Many Nigerians are accustomed to paying subsidised prices for fuel, and they may be reluctant to accept higher costs. Effective communication and awareness campaigns by the government would be essential to address concerns and garner support for the decision.

All in all, President Tinubu’s removal of fuel subsidy in Nigeria presents both benefits and challenges for the economy. While the removal of subsidy could result in increased government revenue, lower fuel prices, and greater investment in the oil and gas sector, challenges such as potential inflation, job losses, and social unrest need to be carefully managed. The government must assess and balance these factors to ensure a smooth transition and minimise the negative impacts while maximising the long-term benefits for the Nigerian economy and its citizens.

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