Nigeria: Fuel Subsidy Removal Short-term pain, long-term gain

LAGOS (Capital Markets in Africa) – President Tinubu has finally done the inevitable: ending the payment of fuel subsidies in Nigeria. Several administrations have tried unsuccessfully in the past to end the subsidy regime. This has been primarily due to strong opposition to reform and the lack of a political will to bite the bullet.

Subsidy is the transfer of money from the government to an entity, leading to a decline in the price of the subsidised product. This leads to an increase in the demand for the commodity, shifting the demand curve to the right

Several countries such as Angola, Kenya and Ecuador have fuel subsidies in place. For instance, Angola, which temporarily overtook Nigeria as the largest oil-producing country in Africa, recently reduced its subsidy payment on petrol, while retaining subsidies on other petroleum products (diesel, cooking oil, gasoil). Ecuador attempted to remove subsidies in 2019 and the resultant public protest led to it being reintroduced. Kenya last year removed its fuel subsidies but retained its diesel and kerosene subsidies.

Subsidy payments have been a major fiscal burden on the Nigerian government, with the FGN funding its subsidy payments via debt. Between 2016- 2023, the FGN is estimated to have spent NGN 11.7trn on fuel subsidies. In the 2023 FGN budget, NGN 3.6trn was budgeted as fuel subsidy payments until June 30. This is equivalent to a subsidy per capita of NGN 18,000. Meanwhile, Nigeria has a health budget per capita of NGN 5,750 and an education budget per capita of NGN  8,950. Bearing in mind that the subsidy projection is only for six months, the 6-month budget projection for the aforementioned sectors will be sharply lower.

The average Nigerian is groaning under the burden of elevated cost of goods and services, poor infrastructure and social amenities, epileptic power supply, a weaker exchange rate and now a higher price of petrol. While in the short term, there would be some pain (inflation, increased poverty and crime rate), in the long term, the Nigerian economy stands to benefit from increased productivity and economic output, which will lead to a reduction in inflation and an increase in employment.

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