Fuel Subsidy Removal: Its Impact On Economic Activities

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By David Wariboko

“Fuel subsidy is gone,” Tinubu declared in his inaugural speech at the Eagle Square on Monday, May 29, 2023, after being sworn in as Nigeria’s 16th President. However, this declaration did not sit well with many Nigerians who were hoping for a focus on key economic issues to improve the overall well-being of the economy and its citizens.

The removal of the fuel subsidy became a topic of concern among policymakers, economists, and media houses across the country. Various policymakers hold divergent views on this issue, with some experts believing that it is the right time for the removal of the fuel subsidy, while trade unions such as the Trade Union Congress (TUC) and Nigeria Labour Congress (NLC) insist on being engaged before such policy actions are taken.

The president’s declaration on May 29, 2023, brought back memories of a similar policy action taken on January 1, 2012, by former president Goodluck Ebele Jonathan, which resulted in a significant increase in the pump price of petrol from N65 to N141 per litre. This move sparked nationwide protests known as “Occupy Nigeria” in major cities across the country. After more than a week of protest, the price was eventually adjusted to N97 per litre and later reduced to N87 per litre.

The president stated that the objective of removing the fuel subsidy is to free up money for massive investment within the country. He explained that the government plans to invest in transportation infrastructure, education, regular power supply, healthcare, and other public utilities to improve the quality of life.

Experts believe that the removal of the fuel subsidy will free up resources for other sectors of the economy. The government currently spends a significant portion of its budget on fuel subsidies, and redirecting these funds to areas such as education, healthcare, and infrastructure development would be more beneficial.

Additionally, establishing domestic refineries to reduce Nigeria’s dependence on imported fuel would also have a positive impact on the economy, creating job opportunities for Nigerians.

However, the removal of the fuel subsidy could lead to an increase in petroleum product prices, potentially causing inflation and reducing purchasing power for consumers. This could have a ripple effect across the economy, affecting the cost of goods and services. There is also a risk of social unrest and protests, as people may perceive the government as insensitive to their needs. Fuel smuggling and other illegal activities could also rise as a consequence. The Nigeria Labour Congress has threatened to call out workers for industrial action if the government does not address the high cost of fuel and provide palliatives for Nigerians.

Fuel subsidy removal is a contentious socio-economic policy issue in Nigeria, with studies indicating that it can have mixed implications.

While it may lead to an increase in Nigerian GDP, it can also have a detrimental impact on household income, especially for the poor. It distorts fiscal planning, encourages inefficient consumption, and increases inequality. Some studies suggest that it could cause inflation, reduce economic welfare, hinder growth, and make firms less competitive.

The impact on businesses would include increased production costs, particularly for those heavily reliant on transportation, which could lead to reduced profitability, job losses, or downsizing in certain sectors, ultimately affecting overall economic activity. Transportation costs would also rise, potentially causing higher prices and disruptions in supply chains.

Overall, the impact of fuel subsidy removal on the Nigerian economy depends on how the government manages the transition, implements supportive policies, and addresses potential negative consequences. Effective communication, transparent governance, and measures to alleviate immediate hardships for citizens and businesses during the adjustment period are crucial.

David Wariboko, Department of Economics and Development Studies Federal University, Otuoke