Oil Burden

A reactionary move to the oil price shock in 1973 ushered in fuel subsidy reforms to cap the pricing of energy products. In 17 years, Nigeria has spent ₦13.7 trillion on fuel subsidies. The enormity of these subsidy payments is why it remains the go-to option when there is a need for a source of revenue. Amid the fears of the effect of fuel subsidy removal, President Buhari-led administration announced the removal of fuel subsidies on 18 August 2022 through the Finance Minister. This proposition has sparked doubts and disapproval across various sectors in Nigeria. These doubts are premised on the scale of corruption in the petroleum sector and the inflation that could be expected after subsidy removal. A few years earlier, the announcement of fuel subsidy removal sparked violent demonstrations in different locations nationwide.

The move by the Buhari administration to cushion the effect of the proposed subsidy through the 800-million-dollar World Bank loan has stirred anxiety for a country with a  ₦44.06 trillion debt burden. For a fact that historically, fuel subsidy removal never involved borrowing, but the palliatives were funded from savings from the subsidy removal. This has cast doubt and suspicion over the move at a crucial period of a change in administration. However, there exist options that are less detrimental to the economy for the long term and short term, which could be through monetary and fiscal policies to increase investments primarily in the power sector, cushioning the effect of subsidy removal. A glimmer of hope also exists in the new Dangote refinery, expected to come on stream in 2023 with an output of 650,000 barrels of crude oil per day.

Despite being a major crude oil producer, Nigeria’s low refining capacity remains a significant obstacle to solving the fuel subsidy problem. Nigeria’s refining capacity is grossly below par with dilapidated refineries. This implies a heavy reliance on expensive imports to meet gasoline needs, which are in high demand. The situation is worsened by economic losses from falling oil prices, creating a niche for dependency on the International Monetary Fund and the world bank. Furthermore, oil theft in the fragile Niger Delta area, with its periodic threats of unrest by aggrieved residents, especially ‘militants’, is a cause for worry. The region, and Nigeria in general, is notoriously ascribed to be a clear case of a poverty paradox. These events limit Nigeria’s capacity to meet its crude oil production daily target.  

Meanwhile, when evaluating the advantages of eliminating fuel subsidies, it is critical to determine who gets the most from the programme. Contrary to common opinion, the World Bank reports that the affluent, not the poor, profit disproportionately from Nigeria’s fuel subsidy. Because Nigeria’s poor rely primarily on public transit, their per capita fuel consumption is substantially lower than that of the wealthy, who often drive private automobiles. Funds for infrastructural development and economic restructuring suggest that subsidy removal is necessary. However, whether funds that would have been used to fund fuel subsidy will be judiciously channelled to other critical sectors remain unclear.

Through the recognition of Nigeria’s crippling debt burden, there is a need for transparency in the petroleum sector. This transparency begins from the refining process down to the cushioning of effects that come with policy reforms. Instead of eliminating state-imposed subsidies due to import reliance, the focus should be increasing value-added petrochemicals to diversify its export base and improve import substitution. Furthermore, there’s a need to discourage the new norm of government borrowing, especially with the evident track record of underutilisation and misappropriation of funds which could increase Nigeria’s debt burden with nothing to show. Funds that would otherwise have been used to subsidise fuel should be channelled to critical sectors to grow the economy. Also, there is a need to put in place measures that will cushion the immediate consequences of fuel subsidy removal on people.