Fuel Subsidy and the Real Economy - Precious Chimdimma Ebere Class of 2022

Opinion piece by Precious Chimdimma Ebere Class of 2022

As one who read Social and Public Policy at my Master's level and has been privy to contributing to developing policies at both local and international levels, I have seen the implications of how a badly executed policy has tremendously affected the polity of the economy.

Having carried out a previous study on the implications of fuel subsidy on the economy, social welfare, and overall development of Nigeria, to share my findings let us first delve deep into understanding what Fuel Subsidy is. Fuel subsidy refers to the government's practice of artificially lowering the price of petroleum products, particularly gasoline, through financial interventions. While it may seem like a beneficial policy, especially for consumers who enjoy lower fuel prices, the long-term consequences of fuel subsidy can be detrimental to the country's progress.

As a public policy expert who understands both lenses (mass agitation vs government policy), it is imperative that the government maintain a balance when implementing changes or removing policies. When a particular policy, such as fuel subsidy, is removed, it is crucial to have measures in place to mitigate any potential negative consequences and ensure a smooth transition. The goal is to avoid disruptions that could lead to social unrest or economic instability, thereby safeguarding national peace.

The practice of artificially lowering the price of petroleum products through financial interventions has been a longstanding policy in Nigeria. While it may initially appear beneficial by providing affordable fuel to consumers, the long-term consequences of fuel subsidy pose significant dangers to the country's development and growth. This article will explore the implications of fuel subsidy on Nigeria's economy, social welfare, and overall progress. It highlights the drain on the national budget, fostering inefficiency in the energy sector, contributing to corruption, and hindering market dynamics and innovation. It also emphasizes the need for a balanced approach in policy implementation and offers insights into the UK's experience with policy transitions.

The Drain on the National Budget:

One of the major dangers of fuel subsidies is their significant drain on the national budget. For example, let’s say, the intention of the government to subsidize petrol was simply to make the product affordable for Nigerians and make life easier. So, the average price of petrol in the world can be as high as N590, however, the Nigerian Government will subsidize the product and fix the price at N185 bringing the total amount of subsidy per liter to N405.

According to data released by NNPC in 2022, the average consumption of liters of petrol in Nigeria per day is 60 million liters. Even though The controversy surrounding the actual daily petrol consumption in Nigeria has been unending with the different agencies in charge of the importation and distribution of Premium Motor Spirits reeling out conflicting figures. The daily petrol consumption in Nigeria remains a mystery. However, If the average consumption of petrol in Nigeria per day is indeed 60 million liters, it would indicate a significant demand for petrol in the country. Nigeria is one of the largest oil-producing countries in Africa, and petroleum products, including petrol, play a crucial role in the country's energy and transportation sectors.

However, Marketers of the product load as much as 100 million liters and above per day.

This means the Nigerian Government is expected to pay as much as N405 × 100,000,000 (liters) as subsidy per day to the Marketers of the product to keep prices at N185 for instance. This brings the amounts to N40.5 billion daily and about N1.2 trillion monthly. Kindly take note that this amount can either decrease or increase following the prices of petrol at the international market.

So, just try to wrap your head around it and know what Nigeria expends on fuel subsidy alone in a year - obviously some billions of dollars.

From the government's end; subsidizing fuel requires a substantial amount of public funds that could otherwise be allocated to critical sectors such as education, healthcare, infrastructure, and social welfare programs. This limits the government's ability to invest in these areas, hindering overall development and growth. One may beg to ask, how judiciously have people in authority utilized the national budget to advance the economy?

To determine the actual daily petrol consumption; the NNPC, which is currently responsible for importing 100 percent of petrol into the country, needs to submit its accounts for forensic auditing as advised by experts.

Fostering Inefficiency in the Energy Sector:

Analyzing from the lens of the Energy Sector, Fuel subsidy fosters inefficiency in the sector by discouraging private investment. When the government artificially lowers fuel prices, it reduces the incentive for private sector participation in the petroleum industry. This lack of investment hampers the development of domestic refining capabilities, leading to heavy reliance on imported petroleum products. Consequently, Nigeria becomes dependent on foreign sources for its energy needs, negatively impacting national sovereignty and economic stability.

Contribution to Corruption and Rent-Seeking Behaviors:

Looking at the various caveats explored above, it is evident that fuel subsidy also contributes to widespread corruption and rent-seeking behaviors. The opaque nature of subsidy disbursement and the large sums of money involved create opportunities for corrupt practices. Some individuals exploit the system to divert funds meant for fuel subsidy, leading to a significant loss of public resources. These corrupt practices perpetuate inequality and hinder socioeconomic development.

Distortion of Market Dynamics and Inhibition of Innovation:

Market analysts and Climate change activists will argue that fuel subsidy distorts market dynamics and discourages innovation in the energy sector. When prices are artificially low, there is little incentive for consumers to adopt energy-efficient technologies or explore alternative sources of energy. This inhibits the transition to cleaner and more sustainable energy solutions, which are crucial for addressing climate change and reducing environmental pollution.

In contrast, if fuel subsidies are phased out or removed, it creates a more level playing field for different energy sources. The true cost of fossil fuels, including their environmental and social impacts, is reflected in the market price. This can incentivize consumers and businesses to seek out cleaner energy options and invest in innovative technologies that reduce dependence on fossil fuels.

For instance, higher fuel prices can stimulate demand for electric vehicles (EVs) and encourage the development of charging infrastructure. With the removal of fuel subsidies, consumers may be more motivated to consider EVs as a viable alternative, leading to increased adoption and market growth. This, in turn, spurs innovation in the EV industry, with companies investing in research and development to improve battery technology, extend driving range, and reduce costs in a more sustainable way. This indeed could usher us into the future of energy sustainability.

A Balanced Approach to Policy Implementation:

Having analyzed the pros and cons of fuel subsidy, in the realm of public policy, it is imperative to maintain a balance when implementing changes or removing policies. When a particular policy, such as fuel subsidy, is removed, it is crucial to have measures in place to mitigate any potential negative consequences and ensure a smooth transition. The goal is to avoid disruptions that could lead to social unrest or economic instability, thereby safeguarding national peace.

To articulate this concept better, let's consider the example of strategically removing fuel subsidy. Instead of abruptly ending the subsidy, a comprehensive approach should be adopted. This approach involves researching and implementing alternative policies and measures that cater to a balance between the needs of the people and the larger economic objectives.

For instance, when removing fuel subsidy, the government can introduce targeted social safety net programs to protect vulnerable populations from sudden price shocks. These programs can provide direct cash transfers, subsidies on essential goods and services especially on transportation, or support for income-generating activities. By implementing such measures, the government ensures that the removal of the subsidy does not disproportionately burden those already facing economic hardships, thereby maintaining social cohesion.

While safety net programs require government expenditure, their impact on the national budget can be managed through careful budgetary planning and fiscal discipline. Governments can implement measures such as means-testing, periodic reassessments, and cost controls to ensure that the programs are effectively reaching the intended beneficiaries while minimizing waste and preventing excessive strain on public finances. Also, these safety net programs can provide an economic multiplier effect. By providing support to vulnerable individuals or households, these programs can help maintain a certain level of consumer spending, which, in turn, can stimulate demand and contribute to economic activity. This can have indirect benefits for businesses and employment, leading to overall economic stability and growth.

Additionally, when removing a policy like fuel subsidy, the government should simultaneously work towards creating an enabling environment for private sector participation and investment. This can be achieved by implementing supportive policies, such as improving the ease of doing business, providing incentives for domestic refining and alternative energy sources, and promoting competition in the energy sector. These measures stimulate economic growth, foster innovation, and create employment opportunities, thereby mitigating any potential negative impacts on the economy.

Furthermore, effective communication and transparency are vital during policy transitions. The government should engage with stakeholders, including civil society organizations, experts, and affected communities, to ensure their concerns are heard and addressed. Transparent reporting on the utilization of public funds and regular audits can help build trust and hold those in authority accountable for their actions, reducing the likelihood of corruption and mismanagement.

Lessons from the UK's Experience with Policy Transitions: Universal Credit

While doing a case study on Universal Credit a welfare benefit system introduced in the United Kingdom, designed to simplify the process of receiving various social security benefits into a single monthly payment. It replaces six existing benefits, including housing benefits and income support, and aims to provide a more streamlined and responsive support system for individuals and families. I picked up a few strategic lessons. The UK government's implementation of Universal Credit provides valuable lessons on policy transitions and the importance of considering social and economic balance. Comprehensive planning, gradual implementation, and mitigating potential negative impacts were key aspects of the Universal Credit reform. The government actively engaged with stakeholders supported employment opportunities, and implemented monitoring and evaluation processes to ensure the policy's success. Even though there were a few lapses in the proper execution, it was commendable by the larger populace. Incorporating these lessons into policy-making processes can enhance the likelihood of achieving desired objectives while maintaining social and economic balance.

Recommendation for the Nigeria Government

In order to ensure a comprehensive and balanced approach to the fuel subsidy removal policy and its impact on the Nigerian population, the government should consider the following recommendations:

• Conduct a thorough and inclusive analysis: The government should undertake a comprehensive analysis of the fuel subsidy removal policy, taking into account the perspectives and concerns of various stakeholders, including citizens, businesses, and experts. This analysis should assess the short-term and long-term effects of the policy on the livelihoods of Nigerians and the overall economy.
• Consider the welfare of the average Nigerian: When determining fuel prices, the government should consider the minimum wage and the standard of living of the average Nigerian. This will help ensure that the cost of fuel remains affordable and does not disproportionately burden the most vulnerable segments of society.
• Implement measures to mitigate the adverse effects: Recognizing that the removal of fuel subsidies may have negative consequences, especially for low-income individuals and households, the government should implement targeted measures to mitigate these effects. This could include implementing social safety nets, such as direct cash transfers or subsidies for essential goods and services, to cushion the impact on vulnerable populations.
• Explore alternative solutions: Instead of relying solely on fuel subsidy removal, the government should explore alternative solutions to address the challenges in the energy sector. This could involve promoting renewable energy sources, improving energy efficiency, and diversifying the energy mix. By investing in sustainable and clean energy solutions, the government can reduce dependence on fossil fuels and create a more resilient and environmentally friendly energy system.
• Prioritize citizen welfare: Above all, the government should prioritize the welfare and well-being of the Nigerian people. This means actively listening to their concerns, engaging in open dialogue, and incorporating their feedback into policy decisions. By adopting a citizen-centric approach, the government can ensure that its actions align with the needs and aspirations of the Nigerian population.

In conclusion, the politics behind fuel subsidy in Nigeria, while often perceived as a means of providing short-term relief to citizens, pose significant dangers to the country's development and growth. When removing a policy, measures should be put in place to mitigate potential negative consequences and maintain social harmony. To achieve sustainable development and foster economic growth, a balanced approach to policy implementation is essential, including targeted social safety net programs, fostering private sector participation, promoting transparency, and engaging with stakeholders. Certainly, accountability and judicious utilization of the national budget by people in authority play a crucial role in advancing the economy and ensuring overall development. While it is true that some individuals in positions of power have misused public funds, it is essential to recognize that effective public policies and good governance can address these challenges and foster positive outcomes. By adopting such a comprehensive approach, policymakers can navigate policy transitions effectively, avoiding distortions of national peace and fostering sustainable development.

Precious Chimdimma Ebere Class of 2022
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