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 Economic Effects of Subsidy Removal in Nigerian Economy

 Economic Effects of Subsidy Removal in Nigerian Economy

Subsidy has so many interpretations. It may be an assistance paid by the government to a business or an entire economic sector or producers of goods and services to offset part of their production costs. It could be in form of government subventions given to a producer that experiences continuous unprofitable operations, but are of strategic importance to the nation. It could be in the form of financial assistance given to farmers, health care providers, ailing factories and many others that are of strategic importance to the government. Petroleum subsidies removal in countries had caused widespread protests. Coady et al. (2006) and Bacon and Kojima (2006) argued that subsidy had been a very inefficient policy tool for poverty reduction since the better-off households had usually disproportionally benefited most from the petroleum subsidies, thus undermining social equity.

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Although it certainly cannot be seen nor described as the best new year gift to Nigerians, on January 1, 2012, when the removal of fuel subsidy on Premium Motor Spirit (Fuel) courtesy of the new policy announced by the Petroleum Product Pricing Regulatory agency (PPPRA). Lagos, the second most populated city in Africa, was a characteristic ghost town on Jan. 1, 2012, Emeh, O.I (2012). The government’s decision to eliminate subsidy sparked mass protest and unrest across the country as fuel costs was increased officially from #67/liter to #141/liter. In 2011 alone, Nigeria’s fuel subsidy cost the country an estimated $8billion and the price tag for 2012 was expected to be even greater. The question of the removing or sustaining subsidy regime had featured as a dominant topic of public debate since January 1, 2012 till date. PPPRA regulates the downstream oil and gas industry on behalf of the federal government. By the removal of subsidy petrol, the downstream sub-sector of the Petroleum Industry is deregulated for petrol. Deregulation leaves market forces as the sole determinant of the product prices. Fuel subsidy was introduced as a temporary measure in 1988 by federal government as part of its Structural Adjustment Program (SAP), as a stop gap measure as refineries underwent rehabilitation, to stabilize the price of petroleum products and was initially designed to last for 6 months.

A subsidy is any measure that keeps prices for a good or product below market level for consumers or producers. Subsidies take different forms, like grants, tax reduction and exemption or price control, sponsored technology, or research and development, Alozie (2009). Oxford Advanced Learners Dictionary (2001) defined subsidy as money paid by a government or an organization to reduce the cost of service or of producing goods so that their prices can be kept low. In addition, Bakare (2012) points out that to subsidize is to sell a product below the cost of production. Within the Nigerian context, subsidy means to sell petrol below the cost of importation.  However, Zainab Ahmed, The Guardian Nigerian @ NGRGUARDIANNEWS (June 6, 2015), The Executive Secretary, Nigerian Extractive Industries Transparency Initiative (NEITI) Zainab Ahmed, who disclosed this in a statement recently, noted the huge amount is good enough to repair the faulty refineries and build new ones. She added that Federal Government has spent #4.5 trillion in the last seven years as subsidy on petroleum products imported into the country. She noted that from the last NEITI Audit Report of 2012, a total #1,355 trillion was processed for payment as subsidy. Out of this amount, #690 billion was actually paid, putting a debt burden of #655 billion on Federal Government. Ahmed added: from our reports, the amount of money that Nigeria has paid so far on subsidy in the last seven years stand at #4.5 trillion. The breakdown shows that #116,554 billion was paid from 2006 to 2008, #3 trillion from 2009 to 2011 and #690 billion in 2012. NEITI believe that the amount is more than enough to repair refineries or build new ones.

According to Eyiuche (2012), the federal government during the military era was of the opinion that the cost of production, transportation of fuel will be so much a heavy for the poor masses of Nigerians to bear alone and therefore decided to pay part of the total amount of fuel cost in order to make the product available and affordable. The military intentions of subsidy on petrol products actually worked from 1973 to 31st march, 1986, when Gen. Ibrahim Babangida increases fuel pump price of petroleum from 20k to 39.5k. This was about 97.5% increment. Source has it that issues worsened with the advent of democracy. On June 1st, 2000, Chief Obasanjo increased the pump price of fuel from #20 to #30 (50% increment). Gradually the aim of the military government that introduced fuel subsidy was subdued and defeated. The fuel subsidy policy has bred several unintended consequences and practices such as smuggling of petroleum products out of the country. The federal government claimed that fuel subsidy policy has made them unable to tackle problems of our collective infrastructure which are the roads, power, agriculture, fixing the refineries etc.

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The cost of fuel subsidy has continued to grow exponentially. This is partly due to the rising cost of fuel-which meant that the government had to spend even more to keep domestic price low- and also due to Nigeria’s increasing population-which resulted in increased fuel consumption; together these pressures made the cost of the fuel subsidy unsustainable. By 2011, the subsidy accounts for 30 percent of the Nigerian government expenditure and it was about 4 percent of GDP and 118 percent of the capital budget. Farouk Lawan Committee Probe on Administration of Subsidies (2012), discovered that over #232B on subsidy paid to marketers for PMS in 2011 not supplied, 31 million liters per day as opposed to marketers claims of 60 million liters and subsidy has become a scheme for mismanagement of revenues. However, according to www.nigerianrc.org, Subsidy computation is in two segments – (landing and distribution cost), the landing cost (total cost = #153.64), Products, Insurance and Freight: #141.40; Lightering Expenses (SVH):#4.03; Traders Margin: #1.19; Storage Charges: #2.60; NPA Port charge: #0.62 Jetty Depot throughout charge: #0.80 and Distribution margins (total cost=#15.49)Retailer’s Margin: #4.60; Transporters’ Margin: #2.99; Dealers’ Margin: #1.75; Marine Transport Average (MTA): #0.15; Budgeting Fund: #5.85; Administrative Charges: # 0.15.

However, the subsidy re-investment programme (sure-p) was initiated by the then president, Goodluck Ebele Jonathan to channel the money realized from the partial removal of subsidy to ameliorate the plight of generality of Nigerians. The president of the Federal Republic of Nigeria, Dr. Goodluck Jonathan set up a subsidy re-investment empowerment programme board and Dr. Christopher Kolade as the chairman. The Kolade committee is to oversee and ensure the effective and timely implementation of projects to be funded with the saving accrued to the federal government from subsidy removal. SURE-P is basically designed to mitigate the removal of fuel subsidy and accelerate economic growth through investment in critical needed infrastructures.  Savings from the subsidy removal under SURE-P are to invested across major sectors of the economy such as Power, Health, Niger Delta etc. A Journal Of The Wind Of Hope Foundation; – According to Sure-P operational structure, the federal government handles 41% of the intervention, 54% goes to the states and local governments while the remaining 5% goes to ecology. Ezekiel G O (2014), Sure-P started receiving funds in July 2012. From then until now, it has received a total of #441 billion, according to Dr. Bright Okogu, Director-General of the Federal Budget Office. The programme has an annually allocated of #180, but its receipts so far have been #126billion (2012), 180billion (2013), and #135billion (2014).The Sure-P also consists of programs which the government pledges to implement within 3-4 years. Some of these programs are: Maternal and Child Health Services, Urban Mass Transit Scheme: the objective of this scheme is to increase mass transit available; this will also involve the provision of zero-interest loans to establish transport operations, Vocational Training Schemes: there will be vocational training centers in all the states in the country and the federal capital territory, Road Infrastructural Projects etc. and Sure- P has some detailed objectives which it was established to serve such as – a tool for ensuring transparency, to accelerate economic transformation through investment in critical infrastructural projects, to mitigate the impact of petroleum discontinuation on the population. Ibe Kachikwu, minister of state for petroleum (August, 26, 2015) disclosed that NNPC will explore third party financing to increase the capacity of the refineries to 80% with 12 -18 months of subsidy removal. He also stated that the target was to raise the refining capacity from the current to 40% to 80% in the next 12 -18 months.

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1.2     Statement of the Problem

Nigeria reminds me of a farmer who sells his harvested cassava for another party to process, and buys the garri back. The buyer gains the peels and other by-products of the cassava – what a foolish farmer. Fuel subsidy was intended to assuage the plight of Nigerians by making the price of petrol affordable, cheaper and available. Here, the reverse is the case, were the fuel subsidy has come to cripple other sectors of the economy and has benefitted the rich and few Nigerians against the generality of the citizens largely the indigent. In spite of the fuel subsidy program, it has not tackled the issue of fuel scarcity which has become a recurrent decimal in Nigeria. And also it has failed to address the fickleness of petroleum products price in Nigeria. With a visit to the remote Nigerian villages will make it evident that this subsidy scam is not benefiting the poor. This set of Nigerians hardly travel, and they don’t have generators. What they need most is good road networks and agric subsidy.

Fuel subsidy problem cannot be distance from the fact that the comatose state of our refineries have not aid the issue of subsidy as it could ordinarily reduced the barrels and cost of barrels refined outside and possibly eject the marketers from importing refined products into the country. The country imports much of its fuel due to a lack of refining capability – a situation blamed on corruption and mismanagement.  Fuel importers expect payment from the government to make up the difference. When government does not pay, fuel runs scarce, frequently causing gridlock and panic, and the fuel subsidy has been found to be rift with corruption, including false claims and overpayments. However, this is problematic; because, subsidy has resulted in the diversion of scarce public resources away from the investment in critical infrastructural sectors such as health, education, agriculture etc and even human capital development and it has also affected the federal government capital expenditure on yearly budget. The huge price disparity has encouraged smuggling of petroleum products across the borders to neighboring countries, where prices are much higher than Nigeria, therefore, ends up subsidizing consumption of petroleum products in neighboring African countries.

According to Vanguard’s January 6th 2015 article, the sum of #10 trillion was spent on subsidy between 2006 and December 2013. Much of the shortfalls in excess crude accounts were used to pay oil marketers. This amount is more than Nigeria’s two year budget figure, three times the budget allocation for health, and two times budget allocation for education in 2014 fiscal year. Therefore, Nigeria does not lack the resources to reach its development goals, rather its resources have been utilize inefficiently. Nigeria relies on refined imports to meet more than 70% of domestic needs and it refunds importers a third of the cost of supply. The subsidy discourages private investors who obtained refining licenses from building plants because of concern that costs may not be recovered without market determined fuel prices. Private investors cannot build refineries when it is more profitable to import fuel with subsidy than to refine and sell locally.

Ibe Kachikwu, minister of state for petroleum (August, 26, 2015) state that over 90% of Nigerians do not benefit from subsidy regime. The truth is that 90% of Nigerians today are really not enjoying subsidy. Subsidy is likely in the big cities like Lagos and Abuja and mainly for the rich because the subsidy element does not trickle down to the hinterland and those who are poor. Okigbo & Enekebe (2011), about #1.3 trillion was spent on fuel subsidy in 2011. This amount is equal to 17% of the combined allocation to education, health, and agriculture in 2012 budget. Fuel subsidy expenses for 2011 constitute about 27% of the aggregate expenditure proposed for the 2012 fiscal year (#4.749). Okigbo & Enekebe (2012), given the inefficiency in the sector and alleged rent seeking activities of the importers and middlemen, a significant portion of the fuel subsidies do not reach the end customer (poor Nigerians). They also stressed that over the period, national poverty level increased from 28% (1980) to 64.4% (2009). Concurrently, compounded annual growth rate of fuel prices has been 23.39% while GDP at constant prices increased by only 3.99%

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Fuel subsidy encourages wasteful consumption, cross-border smuggling, shortages, black market sales, and adulteration of lower subsidized fuels with higher subsidized fuels.

1.3   Research Questions:

In view of the aforementioned problems of fuel subsidy in Nigeria, the following research questions will be answered in the course of the study.

These are:

  1. Is there any significant relationship between economic growth and fuel subsidy in Nigeria?
  2. Is there any significant impact of fuel subsidy to economic growth in Nigeria?
  • What are the factors that determine the quantity and quality of fuel subsidy in Nigeria?

1.4   Objective of the Study

The objective of the study is to look holistically into the economic effects of fuel subsidy removal in Nigeria, to find this the researcher wishes:-

  1. To examine the relationship between fuel subsidy and Economic growth.
  2. To examine the impact of fuel subsidy to Nigeria economic growth.
  • To highlight the measures that should be put in place by policy makers to ensure optimum development, utilization and possible ejection of fuel subsidy.

1.5   Research Hypothesis:

The research shall be guided by the following hypotheses:

Ho1: There is no significant relationship between fuel subsidy and economic growth.

Ho2: Government expenditure on fuel has significant impact on economic growth in Nigeria.

1.6 Scope of the Study

This study covered the period of 1973 – 2015. It covers only the fuel subsidy and petroleum pump price adjustments in the analysis.

1.7   Significance of the Study

This study was considered significant in the following ways:

  1. The study will be of great important to the government especially on the need to remove the subsidy on fuel and have it discontinue.
  2. The research will also serve as a starting point for other researchers who would want to further on this topic and to all those that would find the work helpful in areas of life and policy making.
  3. The research will also throw more light as to why it is necessary for fuel subsidy to be removed and channel to capital expenditure. This will be undertaken with a view to proffering a policy recommendation for both the Nigerian government and stakeholders in the oil sector.
  4. To further illuminate the important of removing subsidy in Nigeria, the objective of the study will center on the contribution of fuel subsidy era and the significance that would emanate from the removal of fuel subsidy.
  5. The study will incontrovertible be of immense benefit to the economic policy makers in formulating appropriate policy measures on handling of fuel subsidy removal in Nigeria.

1.8     Limitation of the Study

There are some factors that limited the research work which include inability to access adequate data as regards to the topic understudy, financial and time constraints.

1.9    Organization of the Study

This project will be divided into five chapters, chapter one covers the introduction with purpose of the study, statement of problem, research question, objective of the study, research hypothesis and also the significance of the study. Chapter two deals with the literature review. Chapter three is on theoretical framework and model specification. Chapter four is of the data presentation and analysis of result while chapter five will be on the summary, recommendations and conclusion of the study. These will be followed by references and appendix.

 Economic Effects of Subsidy Removal in Nigerian Economy


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