Fuel Subsidy: An Unsustainable Burden On Nigeria’s Economy

By Umeaku Divine ifechukwu

The fuel subsidy has become a recurrent issue in Nigeria’s economic discourse. For over a decade, the Federal Government has been attempting to remove or reduce fuel subsidy amidst staunch opposition from the public. While some argue that subsidy removal will lead to an increase in fuel prices, causing financial hardship for the masses, others maintain that it is an unsustainable burden on Nigeria’s economy. In this article, we take a critical look at the current fuel subsidy situation in Nigeria.

Subsidy is an intervention policy used by the government to reduce prices of goods and services for the masses. Basic economic principles dictate that the cost of goods and services equals their production and distribution cost. In Nigeria, the cost of fuel production and distribution has been estimated to be significantly higher than the current retail price of petrol. The difference between the estimated production and distribution cost and the price of petrol paid by consumers constitutes the fuel subsidy.

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Nationwide protests erupted in Nigeria in 2012 after the government attempted to remove fuel subsidy. The government succeeded in reducing the subsidy but conceded to retaining a partial subsidy. However, the partial subsidy has remained an economic burden on the country. The Nigerian National Petroleum Corporation currently bears the brunt of the subsidy, which has posed a significant financial challenge for the state-owned corporation.

The Nigerian government has also attempted to reduce the fuel subsidy burden through market liberalization. The government believes that market liberalization will encourage private sector participation in the downstream sector of the petroleum industry. However, the private sector participation in the downstream sector has been lackluster, leading to the monopoly of the sector by a few elites who exploit the subsidy system.

Additionally, the fuel subsidy system has been marred by corruption and fraudulent activities. There have been instances of fuel subsidy fraud leading to the loss of billions of naira to Nigeria’s treasury. Corruption in the downstream petroleum sector has also raised questions about the efficacy of the subsidy system.

Moreover, the oil-rich nation’s reliance on fuel imports has made subsidy removal a daunting task. The Nigerian government recognizes the need for local refining of crude oil to reduce the country’s reliance on imports. The government introduced the Dangote Refinery in Lagos, which, when operational, will have the potential to refine Nigeria’s entirety production capacity. However, the success of the Dangote Refinery and other potential refineries may not lead to an immediate end to the fuel subsidy system. The upgrading of existing refineries would be an arduous task, and the country may continue.