Fuel subsidies in Nigeria are enormous. At last estimate, the state subsidizes gasoline to the tune of USD 3.9 billion — almost double the entire health budget.
Subsidies exist because the government fixes the price of gasoline for consumers below the international price and uses government resources to pay for the difference. They were first introduced in Nigeria in the 1970s as a response to the oil price shock in 1973.
However, despite numerous attempts at reform, Nigeria has never successfully removed gasoline subsidies, in large part due to strong popular opposition to reform. Such subsidies come at a great cost: spending on other development objectives is lower; the distribution of resources to the state governments is reduced; the vast majority of the subsidy goes to better-off Nigerians; and cheaper gasoline encourages greater pollution, congestion, and climate change.
Despite this, our survey indicates that 70 per cent of Nigerians oppose the reduction or removal of subsidies.
HISTORY OF OIL SUBSIDY IN NIGERIA
The history of the fuel subsidy in Nigeria dates back to April 1992 when Ibrahim Babangida’s government raised the price of a liter of fuel from 15.3 kobo to 20 kobo. He did it again on March 31, 1986, from 20k to 39.5k, and on April 10, 1988, from 39.5k to 42k.
On January 1, 1989, he increased the price from 42k to 60k. Although according to Mr. Oyegoke Adeola of the Mace News, the regime said the increase in price was for private vehicles only, the price remained at 42k for commercial vehicles.
On December 19, 1989, it moved to a uniform price of 60k. On March 6, 1991, the price of a liter of fuel was increased from 60k to 70k and that was the price when he stepped aside in August 1993.
Chief Ernest Shonekan increased the price of a liter of fuel from 70k to N5 on November 8, 1993, but a hectic mass protest, saw Abacha take over power. The incoming Abacha regime reduced the increment to N3.25 on November 22, 1993.
On October 2nd, 1994, the Abacha junta increased the price of fuel to N15, from N3.25 but after massive street protests, the regime reduced the increment to N11 on October 4, 1994. That was the price till Abacha passed on and the Abdulsalami Abubakar caretaker regime raised the price from N11 to N25 on December 20 1998 and after days of sustained protests, it was forced to reduce the increment to N20 on January 6, 1999.
The Obasanjo presidency adopted fuel subsidy as the bedrock of its economic policy, for no sooner than it was sworn in than it effected an increment to N30 on June 1, 2000, but protests and mass rejection forced it to reduce the increment to N25 on June 8, 2000, and further down to N22 on June 13, 2000.
The regime again increased the price to N26 on January 1, 2002, and again to N40 on June 23, 2003. He was to raise it up to N70 by the time he left in May 2009 but the incoming Yar’Adua regime reduced it to N65, after a general protest against the new price regime.
In January 2012, President Goodluck Jonathan increased the pump price of petrol from N65 to N141 but he was forced to reduce it to N97 per litre, due to Labour strike. In January 2015, due to the fall in crude oil price in the international market, the federal government slashed the pump price of Premium Motor Spirit (PMS), otherwise known as petrol, from N97 to N87 per litre. Finally, on May 11, 2016, President Muhammadu Buhari announced that the Federal Government would no longer be paying any subsidy on oil; the price was therefore increased from N87 to N145.
Some have argued that fuel subsidy removal is going to open up the supply and distribution of petroleum products to the forces of demand and supply. Others argue that if our refineries are functioning optimally the issue of fuel subsidy will not arise. But, let us first consider the deplorable condition of our refineries.
This amount is more than Nigeria’s two-year budget figure, three times the budget allocation for health, and two times the budget allocation for education in the 2014 fiscal year. Thus, it can rightly be said that subsidy is very regressive because of its negative effect on the nation’s economy. It takes resources away, especially from the poor and rewards those who consume more fuel.
According to the US Energy Information Centre, as of February 2015, the four refineries in Nigeria have a combined production capacity of 445,000 barrels per day while the country’s daily output of crude is put at 2.44m barrels per day. This entails that we refine approximately 18% of our output, 82% of raw petroleum is being transported to Western and African countries that do not have petroleum. No wonder countries without crude oil, like Kenya, have a working refinery with no oil deposit, rather they anticipate the supply of crude oil from ‘unserious’ countries like Nigeria.
In the last five years, the oil prices had been good, and so the subsidy programme was marginally sustainable. But with the crude price hovering around $50 per barrel, as of June 2016, with debt service cost of 35% and a deficit of 2.22 trillion Naira in the 2016 fiscal year, there is no way subsidy can be accommodated, unless the budget deficit balance is increased. It is also important to note that financing a deficit is not usually palatable as the options are very unfriendly.
We either devalue the already weak naira, borrow from the IMF (our last outing with them left a sour taste), or sell government investments. Unfortunately, the previous governments did not put a lot of rigor and critical into privatization. Hence, a lot of our heritage went for a pittance. So, we are left with devaluation and borrowing options.
Therefore, it is important that we reflect on selling crude below $65 a barrel and paying marketers to import the same crude. The subsidy was an issue when the global oil price was above $100, it should not be an issue now with the current trend.
Getting Empirical: the Economic Implications
The economic implications of fuel subsidies are enormous. Fuel Subsidy payments have continued to grow astronomically, increasing by 349.2% in 3 years according to reports. This figure also represents about 2% of the country’s GDP. Initially, President Buhari approved N3.557 trillion for subsidy payment in the 2022 budget, the figures shot up to N4 trillion in the revised budget, representing about 25%.
The International Monetary Fund (IMF) has warned that the statistics could skyrocket to N6 trillion due to soaring oil prices across the world, with a barrel of oil sold at over $100, following Russia’s invasion of Ukraine. With Nigeria’s heavy importation of refined petroleum, moribund refineries, oil theft, and drop in oil production, the figures quoted might go higher. In the latest financial report of the country, the Federal Government announced that debt servicing surpassed revenue generation in Q1 of 2022. Nigeria generated N1.63 trillion, while debt service was N1.94 trillion.
What if the subsidies were removed?
There would be more refineries. Subsidy payment has discouraged investors from building refineries because they know that it is more profitable to import fuel with subsidy than to refine and sell locally. Deregulation of the downstream segment is one of the country’s getaway routes from the looming economic crisis and endemic corruption in the oil sector.
Saying no to subsidy sustenance could reduce fund leakage from the treasury, increase the balance in the federation account and reflate the depressed economy