June 19, 2024

One year on, Nigerians, businesses groan under weight of fuel subsidy removal


Ilenre Irele

On 29th May, 2023, President Bola Tinubu announced through his inaugural speech as the new President of Nigeria that “fuel subsidy is gone” which means the government is no longer subsiding fuel again. Immediately all the filling stations in Nigeria increased the fuel pump price to like 600 Naira per litre or more depending on the locations in Nigeria.

Fuel subsidy removal affected and made pricing increased by over 200% on delivery of goods and this has affected the cost of purchase by consumers.

As soon as President Tinubu announced the fuel subsidy removal, many filling stations closed their outlets and some started selling at high prices. Some filling stations like Mobil, BOVAS, NNPC are still selling at reasonable prices. The prices of petrol became competitive between Major Marketers and Independent Marketers.

Both sellers and buyers of goods are feeling the effects by experiencing high cost of delivery. The cost of delivery has be doubled because the cost of fuel is like 300% increased. Many transporters abandon their vehicles because they cannot avoid the cost of fuel.

Market prices of all products whether physical or digital increased because all of them depend on the cost of delivery from the origin to the destination. The cost of foods, raw materials, and finished products increase beyond normal calculations. Suppliers had to increase the market value to meet up to cost price and have some profit margin. Both suppliers and buyers experience inflation of price.

Moreover, the Nigeria economy experienced a price increment of like 300% because of the government fuel subsidy removal. This has been the experience of all Nigerians since May, 2023.

This removal came as a surprise because of the political risks associated with subsidy removal. Previous administrations were reluctant to jettison the subsidies.

The subsidies had been in place since the 1970s, when the government sold petrol to Nigerians at a price below cost – though most consumers weren’t aware of this.

The 1977 Price Control Act made it illegal for some products (including petrol) to be sold above the regulated price. The Olusegun Obasanjo regime introduced this law to cushion the effects of inflation, caused by a worldwide increase in energy prices.

Fuel subsidies have been controversial in Nigeria, and some analysts see them as inequitable. Very few Nigerians own vehicles. Nigeria is among the countries with the least number of vehicles per capita, with 0.06 vehicles per person or 50 vehicles per 1,000 Nigerians.

So critics have argued that the subsidies benefited mainly the elites even though they could afford to buy fuel at market prices.

The subsidies were also considered to be a drain on public finances, costing the government US$10 billion in 2022. About 40% of Nigeria’s revenue in 2022 was spent on fuel subsidies.

Fuel subsidies in Nigeria were notorious for their opacity and graft. Billions of dollars were said to have been lost through corrupt practices in the payment of the subsidies.

Fuel subsidies have traditionally been a double-edged sword in Nigeria. While intended to ease the financial burden on the government and stimulate economic growth, its removal has triggered a domino effect on the cost of living. One of the most immediate and tangible consequences is the surge in fuel prices, directly affecting transportation costs and subsequently impacting the prices of goods and services.

Transportation is the lifeblood of Nigeria’s economic activities, and the majority of citizens heavily rely on it for their daily commutes. As fuel prices increase, the cost of transportation follows suit, resulting in a spike in the prices of essential goods. This ripple effect is especially challenging for low-income earners who allocate a significant portion of their income to basic necessities.

Moreover, the removal of fuel subsidies has c
Professor Oyinkan Adetola a political economist told EnergyDay that ” the cost of living has increased because of the removal, making life difficult for ordinary Nigerians without adequate palliative in place. The token released as palliative was a political one meant to service the ego of governors.”

” This removal contributed to inflationary pressures, making the overall economic landscape more challenging for the average citizen. Inflation erodes the purchasing power of consumers, making it harder for individuals and families to meet their basic needs, Adetola said.

“This situation becomes more pronounced for vulnerable populations, amplifying existing socioeconomic disparities.

Dr. Olufemi Omoyele of Osun State University told this medium that it has affected average citizens, ” buy on the flip side, proponents of subsidy removal argue that it could lead to a more efficient allocation of resources, allowing the government to redirect funds to critical sectors such as healthcare, education, and infrastructure. If managed judiciously, these redirected funds could potentially create long-term benefits for the masses by improving public services and fostering economic growth. But it depends on how responsible the government is. So far, we are yet to see the benefits on the people.”

He said” the success of such a transition heavily depends on the government’s commitment to transparency, accountability, and effective governance. Clear communication and well-thought-out policies are essential to reassure the public and mitigate the short-term shocks associated with subsidy removal.

” In navigating the complexities of fuel subsidy removal, it is imperative for the Nigerian government to implement accompanying measures to protect the vulnerable segments of society. Social safety nets, targeted subsidies for essential commodities, and initiatives to bolster small and medium-sized enterprises can help cushion the impact on the masses.

He said removal of fuel subsidies often leads to an immediate increase in fuel prices. This can trigger a chain reaction, causing higher transportation costs and ultimately contributing to inflation. Prices of goods and services may rise, affecting the purchasing power of consumers. This has been the experience of the masses.

With higher fuel prices, transportation costs for both individuals and businesses have risen, impacting various sectors of the economy and potentially leading to higher prices for consumers.

Though it may have relieved pressure on government finances, but many say it has not led to investments in other sectors such as healthcare, education, and infrastructure.

Social Impact:
2.1. Social Unrest: Historically, fuel subsidy removal has led to protests and social unrest due to the immediate increase in living costs. Citizens who were reliant on cheaper fuel prices might find it difficult to adapt to the sudden price hike.

2.2. Income Distribution: The burden of increased fuel prices disproportionately affects low-income individuals and families, potentially worsening income inequality. These vulnerable groups spend a larger portion of their income on fuel and basic necessities.

The removal of fuel subsidies in Nigeria has been a complex decision with multifaceted implications. While it can lead to positive outcomes such as improved fiscal health, increased revenue generation, and environmental benefits, it also poses challenges in terms of inflation, social unrest, and the potential negative impact on low-income individuals. Many believe government has not done much in letting the benefits trickle down to the people.

Any decision to remove fuel subsidies should have been accompanied by a well-thought-out strategy that considers mitigation measures for the vulnerable population and promotes sustainable economic growth.

The Bola Tinubu administration could have chosen from various mechanisms to minimise the negative impact of subsidy removal.

Omoyele said as proposed by the World Bank, a temporary price cap would have ensured that fuel price increases did not inflict too much pain on consumers. This approach would also have enabled the government to significantly reduce, but not eliminate, the fiscal burden of the subsidy.

Another approach is periodic price adjustments: setting the price based on a moving average of previous months’ import costs. These adjustments could have been made together with a price cap. The Philippines is one country that successfully removed fuel subsidies in the 1990s, using the price adjustment mechanism.

Gradually phasing out subsidies would have been a better approach for a number of reasons.

Investigations showed that Nigerians had become suspicious of government’s intentions, given their economic experiences with the previous administration of Muhammadu Buhari. Those experiences include high inflation and unemployment rates, rising poverty and insecurity.

Tinubu should have re-established government credibility and good intentions first. He could have offered economic succour such as cash transfers and food subsidies for poor Nigerians, wage increases for workers and retirees, scholarships or tuition waivers for indigent students in tertiary institutions, free lunches for primary and secondary students in public schools, and subsidised public transport.

After demonstrating he meant well, he should have gradually rolled out the subsidy removal. Nigerians would have been psychologically prepared for what was coming, including inflation.

The inflationary impact of subsidy removal would have been less severe. Nigerians would have been more tolerant of difficult economic policies. People will accept difficult economic policies if they know their government is humane and pro-people.

Secondly, an incremental approach would have enabled the government to come up with programmes targeted at those most likely to be hurt by subsidy removal. This would have ensured buy-in. The “palliatives” introduced by the Tinubu administration and state governments are temporary and have a limited reach.

Gradual subsidy removal would have enabled the government to engage with groups that would be affected by the policy. Groups representing labour, manufacturers, students, women and others could have provided insights into what would be needed to help their members adjust.

This interactive approach would have promoted transparency and credibility in the conduct of government policies.

Many vulnerable Nigerians were already under severe economic pressure. Apart from high unemployment and poverty rates, inflation was biting very hard.

The abrupt removal of fuel subsidies, without first putting in place shock-absorbing measures, will make it more difficult for the government to achieve the policy’s long-term aims: fiscal sustainability; higher levels of investment in productive sectors of the economy; economic growth; and investment in renewable energy.

Almost a year into subsidy removal, major crises bedeviling the petroleum sector continue with ripple effects on the livelihood of Nigerians.
The Nigerian government had for decades subsidised and fixed retail prices of petroleum products.
The payment, however, threatened the nation’s fiscal position and affected the government’s ability to fund developmental projects.

In 2022 over N4 trillion was used to subsidise petrol, more than the government spent on education and healthcare combined.

Speaking during his inauguration, Mr Tinubu said the petrol subsidy regime was not sustainable.

He also stated that funds for the subsidy will be diverted to other things like public infrastructure, education, health care and jobs.

Apart from helping to save public funds, the removal of the subsidy was also expected to allow for more private-sector operators in the petrol sector including in the importation of the product.

Following the announcement, the Nigerian National Petroleum Company Limited (NNPCL) directed its outlets nationwide to sell fuel between N480 and N570 per litre, an almost 200 per cent increase from the initial price below N200, leading to a significant increase in transportation fares and prices of goods and services.

The pronouncement was trailed by panic buying and gridlock across filling stations in many parts of the country, even as regulatory bodies called for calm amid the chaos.
Again in July 2023, petrol pump prices rose to about N617 per litre at various outlets of the NNPCL in Abuja and many parts of the country.

At the time, the NNPCL attributed the rise in prices to ‘market forces’.

The NNPCL Group Chief Executive Officer, Mele Kyari, explained that with the deregulation of the oil sector, market realities will force the price of petrol up sometimes and at other times force it down.

NNPCL has since 2016 been the sole importer of PMS in Nigeria. But on 15 June, the company announced it was no longer the sole supplier of petroleum products in the country.

The development came months after the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) said it was fast-tracking the process of issuing oil marketers licenses to import petroleum products in its bid to break the monopoly of the NNPCL in compliance with the Petroleum Industry Act (PIA) 2021.

On 19 July 2023, Emadeb Energy Services Limited imported the first batch of petrol of about 27 million litres into the country.

According to the company, the product came into the country in a cargo valued at over $17 million with huge foreign exchange components.

Speaking in Lagos at an event to mark the inaugural importation of petrol into the country by Emadeb Energy, the Chief Executive Officer of the company, Adebowale Olujimi, said the company had proven its capacity and readiness to actively play its part in ensuring steady product supply in the country.

He noted that despite the removal of petroleum subsidy, local refining remained the best option for the country to guarantee energy security, considering the huge foreign exchange implication of the imported products.

“The value of this cargo here, you cannot find it in the market just like that. It is over $17 million, and you can’t, in any way, with what the FX is today. Today, we have imported 27 million litres of PMS, but local refining is the way forward for us in this country.

“We want to be one of the early comers into this game. In conjunction with some of our trading partners, we decided to source for the licences and that is what has brought us here today,” Arise TV quoted Mr Olujimi as saying.

But contrary to public expectations, in many circles there have been speculations that the government had partly reintroduced petrol subsidy, unannounced, to keep the pump price at N617 given the continued fall in the value of naira against the dollar and the price of crude oil in the international market.

Since Nigeria depends on imported refined products, the exchange rate is a key determiner of the prices they are sold to consumers.

In August 2023, Mr Tinubu assured Nigerians that there would be no further increase in the pump price of petrol, despite the deregulation of the product.

The Special Adviser to the President on Media and Publicity, Ajuri Ngelale, disclosed this while briefing journalists in Abuja after a closed-door meeting with the president.

“The president wishes to assure Nigerians, following the announcements by the Nigerian National Petroleum Company Limited (NNPC) just yesterday, that there will be no increase in the pump price of petroleum motor spirit anywhere in the country,” the spokesperson said. “We repeat, the president affirms that there will be no increase in the pump price of petroleum motor spirit.”

Mr Tinubu also acknowledged that there are inefficiencies within the downstream sector that are contributing to the fuel price controversy. He assured that all loopholes associated with the smooth delivery of petroleum products in the country will be addressed immediately.

Meanwhile, on 6 October 2023, the National President of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), Festus Osifo, insisted that the Nigerian government had restored the subsidy on petrol, despite the official government policy of ending the subsidy regime.

Mr Osifo, who is also the president of the Trade Union Congress (TUC), one of Nigeria’s two largest workers union coalitions, while featuring on a Channels Television programme, Politics Today, said due to the cost of crude oil in the international market and the exchange rate, the government still pays subsidies on petrol.

“The government has to come clean. In reality today, there is a subsidy because as of when the earlier price was determined, the price of crude in the international market was somewhere around less than $80 to a barrel. But today, it has moved to about $93/94 per barrel for Brent crude. So, because it has moved, then the price (of petrol) also needed to move,” Mr Osifo said.

In its reaction, NNPCL however said the Nigerian government has not resumed payment of subsidy on petrol.

“No subsidy whatsoever. We are recovering our full cost from the products that we import. We sell to the market and we understand why the marketers are unable to import,” Mr Kyari told State House correspondents after a meeting with the president at the Presidential Villa, Abuja.

“We hope that they do it very quickly and these are some of the interventions the government is doing. There is no subsidy.”

In the midst of the uncertainties, many of the crises hampering smooth operations in the oil sector linger as Nigerians continue to lament the ripple effect of skyrocketed pump prices.

Forex crisis
Over the past seven months, the naira has depreciated by over more than 50 per cent at both the authorised and unauthorised market segments, after the Central Bank of Nigeria (CBN) announced in June that it had collapsed all forex windows into the Investors and Exporters (I&E) window.

The move, according to the central bank, is part of the Nigerian government’s efforts to improve liquidity and stability in the market and attract foreign investors into the Nigerian economy.
Although the policy was widely applauded as well-intentioned and necessary, it has put additional pressure on the local currency and manufacturers, with ripple effects on domestic prices.

Oil marketers that had allocations to import and supply petroleum products are unable to do so due to scarcity of foreign exchange.

Some fuel marketers said they are hardly able to access dollars and open letters of credit for their imports.

Speaking at the National Executive Council meeting of the Natural Oil and Gas Suppliers Association of Nigeria (NOGASA) in October 2023 Benneth Korie, the national president of the association, said many petroleum products depots are currently deserted due to a lack of products caused by foreign exchange rate volatility.

“Depot owners are so terribly affected by the increasing cost of crude oil and exchange rate, to the extent that many depots are practically deserted as their owners are unable to secure bank loans to fund their business due to high-interest rates.

“Banks are not willing to guarantee funds release to stakeholders as a result of the difficulty, instability and galloping rates of foreign exchange and high cost of the dollar. Many depots are presently dried up or out of stock, and this is no gainsaying as it is evidently verifiable.

“Worst hit are filling stations whose owners find it extremely difficult to secure funds to procure products for their retail outlets. Both the independent and major marketers are so terribly affected,” Mr Korie said at the time.

NNPCL later confirmed it had returned to being the sole importer of petrol in the country.

Mr Kyari who disclosed this during the Energy Labour Summit organised by the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) in Abuja towards the end of last year said licensed private oil companies are unable to obtain foreign exchange for importation.

“We are the only company importing premium motor spirit (PMS) into the country.

“None of them (oil companies) can do it today. For them, access to foreign exchange is difficult. We create foreign exchange (FX), therefore we have access to FX, while their access to FX is limited,” Mr Kyari said.

Crude oil and refined petroleum products are subject to the volatility in the international oil market, and a spike in crude oil price directly impacts retail prices of refined petroleum products at filling stations.

Recently, due to global economic uncertainties, crude oil prices have fluctuated, with direct impacts on the retail petroleum product prices.

On 3rd October 2023, the prices of crude oil fell more than two per cent.

Brent crude oil futures were down $2.02, or 2.22 per cent, to $88.90 a barrel at 1228 GMT, while U.S. West Texas Intermediate crude (WTI) fell $2.10, or 2.35 per cent, to $87.13 per barrel, Reuters reported.

In many cases when the global oil price falls, Nigerians do not usually benefit.

The fall raises more concerns for Nigeria at a time when the country faces severe revenue problems, pipeline vandalism and crude oil theft in its oil-producing region.

Earlier in September last year, the Speaker of the House of Representatives, Tajudeen Abbas, said Nigeria lost N16.25 trillion to crude oil theft between 2009 and 2020.

He said crude oil theft had hampered the growth of the country’s oil production, with between five and 30 per cent of crude oil production lost daily.

Leave a Reply

Your email address will not be published. Required fields are marked *