Business Edge | The Cost of Nigeria’s Fuel Subsidy

The Cost of Nigeria's Fuel Subsidy | Business Edge With Gospel Obele, Chief Economist

The issue of fuel subsidy is one that most Nigerians are interested in as it affects every single facet of their lives, either in business or domestically. This is why conversations around the removal of subsidies generate reactions, controversies and sometimes, strike actions any time it comes up. In recent weeks, the fuel subsidy conversation has once again come up, this time with the Buhari administration publicly mulling over the possibility of completely removing it permanently. On Business Edge of January 28, Tolulope Adeleru-Balogun is joined by Gospel Obele, Chief Economist at Streetnomics Limited to examine the cost of fuel subsidy in Nigeria, the pros and cons of having it and what its continued existence means for Nigeria’s economy.

How Fuel Subsidies Became Normal In Nigeria

Subsidies were introduced to Nigeria in the mid-1970s after the oil price shock of 1973.  The said shock led to a global rise in oil prices and the rationale was that for Nigerians not to pay more, the government had to regulate local energy prices. Fuel subsidies became the law in 1977 by the way of a decree by the then General Olusegun Obasanjo military regime.

However, the existence of these subsidies has been a major national discourse with successive administrations attempting to remove them with each one meeting with major resistance by the populace and labour leaders.

Gospel Obele of Streetconomics says on Business Edge that subsidies by themselves are not necessarily bad as they were put in place as a form of social contract between governments and citizens.

“The idea of subsidies is a form of social relief for the average citizen. It’s not necessarily a bad thing,” he said. “It’s just a tool that can be used correctly or wrong or in the hands of the wrong people.”  He adds though that the controversy around its removal happens because any change in price is transferred to the average Nigerian.

These Are The Numbers

Fuel subsidies are a drain on the Nigerian commonwealth, further exacerbated by incompetent government policies, outright corruption, cross-border smuggling and astronomical government expenditure. In the last ten years, Nigeria has spent 8.9 trillion naira on fuel subsidies. This year, the country is expected to spend –.

The rising cost of crude oil is also a catch-22 phenomenon for Nigeria: while the country earns more revenue from the export of crude oil (which analysts suggest might reach the $90 mark in the coming weeks), the import of refined fuel takes out that advantage and more. As of now, although the retail price of premium motor spirit i.e. petrol is N165, the Ministry of Finance maintains that the landing cost of petrol is N282; meaning that government pays the difference on every litre imported to Nigeria. The daily consumption of fuel in Nigeria is 60 million litres. The country is expected to spend three trillion on fuel subsidies in they continue this year.

An Expert’s Opinion

Gospel Obele thinks the cost of fuel subsidy is unsustainable but understands the common resistance to it. “We…forget the real elements that created the subsidy in the first place: poor refineries, poor public leadership, high government expenditure, debt serving, waste etc.” However, to him, it can not continue indefinitely and the Nigerian government must make real investments in other areas that affect the average Nigerian so as to effect real change. “ [Things] like the five thousand naira policy [a policy mooted by the finance ministry that gives N5,000 to the most vulnerable Nigerians] is just patching the problem and just fixing it. … N-Power … and Sure-P cannot be a fix for the effects of fuel subsidy removal in Nigeria. Each government that does these types of programmes is just repeating the cycle of poor economics.”

Watch Business Edge with Tolulope Adeleru-Balogun on News Central above.

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