What is fuel Subsidy?:
Simply put, fuel subsidy, within the Nigerian context, is an attempt by the Nigerian government to cushion the high prices of purchasing PMS (premium motor spirit) and HHK (household kerosene) by its citizens. The government achieves this by selling the oil products to marketers at a rate lower than the market price, which in turn sets a cap on the pump prices they can sell to the public through the government petroleum agencies and regulatory bodies.
What are the positive impacts of the fuel Subsidy?:
Affordable and Access to Fuel: The subsidy makes the petroleum products available at affordable prices to the general populace but more especially to the lower-income groups.
Poverty alleviation: Subsidies are intended to alleviate the financial burden of low-income earning households, allowing them enough room to reallocate their resources to other needs within the home.
Social Stability: A sharp rise in oil prices within an economy heavily reliant on oil for its revenue can lead to social instability and unrest within the State; as prices of other commodities begin to rise due to the sharp rise in global oil prices.
Economic Boost: Subsidised fuel prices can stimulate economic activity within sectors reliant on petroleum like the transportation sector. Lower fuel prices can reduce the cost of transportation expenses, enabling businesses to operate more efficiently.
Industrial Development: Subsidies can help support the growth and development of domestic industries, particularly those that depend on affordable energy sources. Lower energy costs incentivize investment and promote the competitiveness of industries, potentially leading to economic diversification and industrialization.
What are the negative impacts of fuel subsidy?;
It places an economic burden on the government who have to divest large monies from development to pay for the subsidies.
Subsidies distort the market dynamics and discourages local oil refining while encouraging importation, leaving the country open to the volatile fluctuations to international oil prices.
The subsidy regime is susceptible to mismanagement, inefficiency, and corruption; the regime has been associated with smuggling and diversion of subsidised petroleum products to other markets outside Nigeria. There have also been reports of ghost marketers and fraudulent claims, which continue to hamper the benefits of the subsidy program.
Fuel subsidies have often contributed to fiscal imbalances, leading to strained government resources and leaving the government with no option but to borrow to sustain the program. This has been shown to have long-lasting negative consequences for the nation.
Lowered cost of purchasing petroleum products lead to high consumption and inefficient use of energy resources. In an age where we are pursuing green energy transitions, subsidy leads to cushioned or reduced cost of petroleum products, which in turn results in inefficient use and higher consumption of those resources, leading to increased carbon emissions.
SHOULD NIGERIA REMOVE FUEL SUBSIDIES?
Removal of fuel subsidies in Nigeria has been an ongoing conversation for over a decade, and successive governments have continued to find ways to put a complete end to the scourge that comes with the subsidies. The discussion on the removal of subsidies led to the development of the SURE-P (Subsidy Reinvestment and Empowerment Program) program, which was targeted at reinvesting funds recuperated from removing subsidies into other developmental projects.
The group managing director of the NNPC ltd, Mr. Mele Kyari stated in a recent interview with Arise TV that despite the provision of the Petroleum Industry Act (PIA) 2021 terminating subsidy as of February 2022, the federal government continued to intervene with the provision of subsidy up until 2023. He further stated that the federal government has not been able to pay the monies for subsidy for the last couple of months, which means that the NNPC has had to shoulder the responsibility of subsidy and therefore has not been able to make any remittances to the federation account (this is why the fuel prices changed as soon as the new administration announced the end of the subsidy regime).
Removal of the subsidy should usher in a regime of new players in the market space, which should lead to competition; these market forces will eventually force the pump prices of petroleum and other products to become cheaper than they are now. Already, we are beginning to see movements within the industry as new players apply for and receive permits from the NMDPRA.
Going forward, the decision to discontinue fuel subsidies, completely, in Nigeria should be thoroughly reviewed, with a balanced assessment of the benefits and negatives. While the elimination of subsidies can result in fiscal sustainability, efficient resource allocation, economic diversification, improved governance, and environmental sustainability, it can also result in higher living costs, inflationary pressures, social unrest, and disproportionate impacts on vulnerable populations. Policymakers must carefully manage the transition, put mitigation measures in place, and ensure that alternative social safety nets are in place to safeguard society's most vulnerable sectors while we wait for the market to stabilize. Finally, while it may appear like the hardship of the removal of the fuel subsidy is biting hard on every Nigerian, it is a welcome relief that the regime is finally over. It seems like the era of fuel queues due to the unavailability of petroleum is at an end, and we are hopeful that if managed properly, the current hardship will abate soon enough while the expected positive economic impact of the subsidy removal will bring lasting prosperity. In the end, Nigerians should be the real winners in the long run, if the right things are done.
Chijioke Odu ESQ.
Associate
Energy and Corporate Finance Law Practice