Early decisions by President Tinubu on the petrol subsidy and the naira devaluation will have significant implications for Nigerians. The fuel subsidy removal means that the government will stop paying for the difference between the regulated price of petrol, which was ₦185 per litre, and the market price, which currently stands at around ₦600 (£0.61).
Energy subsidy reforms are crucial because the economic inefficiency and the harmful impact of fossil fuel consumption are becoming blindingly clear. The International Monetary Fund (IMF) emphasises the long-term benefits of energy subsidy reforms and advocates for green taxes to address climate change effectively. Policymakers, particularly in middle to lower income countries, increasingly recognise the significance of energy subsidy reforms and the implementation of green taxes for sustainable economic growth.
In Nigeria, the subsidy programme cost ₦4.39 trillion (£448 million) in 2022, according to data from the state-owned NNPC, and this has been made even worse by the NNPC’s failure to foster local petrol production that has left the country reliant on fuel imports. The drop in official oil production figures due to oil theft and reduced investment in oil-production facilities hurt the federal government’s revenue outcomes badly.
“The drop in official oil production figures due to oil theft and reduced investment in oil-production facilities hurt the federal government’s revenue outcomes badly.”
@chxta
Tweet
POLICY BORNE FROM NECESSITY
The decision made by the Tinubu administration was facilitated because the Buhari Administration had made no budgetary provisions for the petrol subsidy payment after mid-2023 and set aside ₦3.36 trillion for payments covering the year’s first half. So all he had to do was stay on track with the extant budgetary situation and maintain his support of the removal. Granted that the Tinubu Presidency itself is very much in its infancy, but his economic team has pretty much been in place with him for years, so he has had enough time and resources to get an impact-assessment analysis on the likely effects of the subsidy removal and different measures that could be used to make for a painless transition.
Having said all of this, while removing this subsidy is economically justified, it must be managed carefully to mitigate potential unrest and ensure the anticipated benefits are realised. Previous governments hesitated to act because of the politically sensitive nature of the topic, particularly in influential urban areas capable of inciting wider discontent, and this brings us to the manner in which the subsidy was removed.
“…while removing this subsidy is economically justified, it must be managed carefully to mitigate potential unrest and ensure the anticipated benefits are realised.”
@chxta
Tweet
To facilitate a smooth transition, involving stakeholders such as businesses, trade unions, social groups, and civil society in regulatory impact analysis, environmental impact assessment, and social impact assessment would have offered valuable insights and recommendations. It would have been proper for the President to have done more to minimise the damaging impact caused by the removal of the fuel subsidy on the purchasing power of Nigerians.
LESSONS FROM ABROAD
Nigeria could learn from successful transitions in India and Egypt. These countries implemented gradual increases in fuel prices while expanding social safety nets and supporting the transition to more affordable fuel sources. Similarly, Nigeria could consider gradually increasing fuel prices, investing in social safety nets, and promoting the adoption of autogas vehicles and generators. Autogas, a cleaner and domestically produced fuel, could receive subsidies for conversion and infrastructure development alongside public education campaigns to drive demand.
“Nigeria could learn from successful transitions in India and Egypt. These countries implemented gradual increases in fuel prices while expanding social safety nets and supporting the transition to more affordable fuel sources”
@chxta
Tweet
It is crucial to emphasise that these measures offer more sustainable subsidies than the continuous theft associated with the previous regime. By adopting these strategies, the Nigerian government can establish a sustainable local energy market with prices similar to pre-subsidy removal levels without the detrimental burdens of the old system.Furthermore, reforms should be phased in gradually rather than imposing sudden price increases. Nigeria already needs more electricity generation, leading to widespread reliance on generators fuelled by petrol and diesel. Abrupt and substantial fuel and electricity price hikes would significantly disrupt individuals and businesses. A gradual and predictable approach allows for adjustments and minimises disruptions.In the end, the Tinubu presidency’s decisions to remove petrol subsidies and devalue the currency are economically justifiable but require a careful implementation to ensure the desired benefits are achieved. Energy subsidy reforms and green taxes are crucial for sustainable economic growth and combating climate change. A well-planned and phased approach will facilitate a smoother transition and minimise disruptions for Nigerians.
Cheta Nwanze is the Lead Partner at SBMIntelligence, a Nigerian think-tank and heads the research desk. He has worked in numerous Information Technology and Media organisations, key among them are the Daily Times of Nigeria, where he was managing editor for a while, and the defunct 234NEXT.
Cheta is passionate about writing and has published numerous articles in Sunday Telegraph, Premium Times, the Cable, and Financial Nigeria, all in Nigeria. His opinion pieces have been published in the Africa Report, Africa Is A Country, Al-Jazeera, The Guardian (UK) and SuperSport (South Africa). He tweets regularly at @Chxta.