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Nigeria fuel subsidy cut & spiralling costs: All you need to know | Oil and Gas News

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EXPLAINER

A controversial announcement in the new president’s inaugural speech has set off a chain of events in Africa’s largest oil producer – and economy.

The administration of Nigeria’s new president, Bola Ahmed Tinubu, has started with a snag.

At his inauguration on Monday, Tinubu announced the total removal of the highly controversial but popular fuel subsidy, resulting in high prices and long queues nationwide. Although the policy goes into effect on July 1, it has already sparked concerns – and chaos – as Nigerians rush to buy fuel before its cost increases even further.

The fuel price is expected to jump from the official pump price of 185 naira ($0.40) to between 350 ($0.76) and 550 naira ($1.18). This is expected to have widespread economic consequences in Nigeria where 133 million people live in multidimensional poverty, according to the United Nations.

This move is already proving to be widely unpopular among citizens.

Here’s all you need to know about Nigeria’s fuel subsidy and how it became a buzzword in Africa’s biggest oil producer.

What exactly is Nigeria’s fuel subsidy?

  • About 70 million litres of fuel are consumed daily by Nigeria’s estimated 200 million people.
  • Nigeria’s oil is refined in Europe and imported back to Nigeria, a process that contributes to its high costs. Those costs are shouldered mostly by the Nigerian government as subsidies to reduce the costs of fuel paid by the consumers.
  • This retail cost determines the costs of almost every good and service in Nigeria. The Nigerian government introduced an oil subsidy to cushion the effect of rising global oil prices in the 1970s. The Olusegun Obasanjo military regime formalised the subsidy in 1977 when it promulgated the Price Control Act which regulated prices of items including fuel.
  • Subsequent administrations attempted to remove the subsidy but failed to do so because it is widely popular among citizens, many of whom consider it their major – or only – benefit from the federal government. It gradually became a heavy burden to the government as the cost of maintaining the subsidy increased over the years.
  • Subsidy became a buzzword in January 2012 when then-president Goodluck Jonathan announced the subsidy removal. Fuel prices increased from 65 naira ($0.14) to 140 naira ($0.30) per litre.
  • The removal sparked widespread protests for two weeks, organised by labour unions, civil society and opposition party leaders, including Tinubu. The protests brought the country to a standstill, forcing the government to lower the price to 90 naira ($0.20) and reintroduce the subsidy.
  • Subsidy payments have always been thwarted by issues of corruption and a lack of fiscal transparency.  In 2012, a 200-page report released by a parliamentary inquiry uncovered a $6bn fraud, involving officials at the state-run Nigerian National Petroleum Company (NNPC) – now a limited company. Since then, governors and members of parliament have routinely called for an investigation into NNPC and a review of subsidy payments to oil marketers.
  • In 2015, former president Muhammadu Buhari referred to the subsidy as “fraud” and “non-existent” even though his administration retained it, spending 11.7 trillion naira ($26bn) between 2016-2023.

What is happening now?

  • Ahead of the February 2023 election, all three major presidential candidates promised to remove the subsidy and introduce oil sector reforms in their manifesto, signifying a consensus among the political class to do away with the assistance.
  • Experts agree that in light of Nigeria’s economic reality, the subsidy has become a huge financial burden. “There is no doubt that fuel subsidy has adversely impacted Nigeria’s finances and keeping the same would have been fiscally irresponsible,” Ayodele Oni, energy partner at Lagos-based Bloomfield Law Practice told Al Jazeera.
  • The Buhari administration left a 77 trillion naira ($167bn) debt to local and foreign creditors. Already, 96 percent of the government’s revenue is being used to service debt and there are fears the government’s cash crunch could worsen if subsidy payments continue.
  • Since the depletion of state coffers, the subsidy payment under the past administration was serviced via debts, according to the former finance minister.
  • Last week, Nigeria commissioned the world’s largest single-train refinery to boost oil production and lessen its dependence on imports. But the new development is not expected to affect the price in the short term.

What have the reactions been so far?

  • Following Tinubu’s announcement, NNPC Limited said it welcomes the removal of the subsidy. Its boss added that the government owes the company 2.8 trillion naira ($6bn) for the petrol subsidy.
  • Labour unions have protested against the plan, citing a lack of transparency and a history of corruption in government spending.
  • Even as Tinubu’s election is being contested in court, his government is widely seen as a continuation of Buhari’s administration. But Oni said the government, albeit unpopular, has acted correctly. “From a purely economic standpoint, it makes sense,” he said. But government must work to ensure regular power supply, and improve rail and other means of transport to reduce the costs citizens expend on petroleum products, he said.
  • Nigeria’s bloated cost of governance has also raised concerns among people who feel the government must adjust its spending, too. “You can’t remove subsidy without offering to reduce the waste in government. You can’t be living large while the citizens bear the higher cost of living,” said Oluseun Onigbinde, director at BudgIT, a nonprofit and transparency watchdog.



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