Subsidy (to be or not to be)
Dear readers, we hope you had an awesome Easter break and that getting back to the routine of work and school was not so hard.
In the early 1970s, after the oil crash, the Nigerian government introduced fuel subsidies to alleviate its impact on domestic fuel prices. Since then, fuel subsidies have been institutionalised and rolled over each successive government. The subsidies are paid from the revenue proceeds of the NNPC. So, when the NNPC receives revenue from its sale of crude oil, it uses that revenue to pay for subsidies, and the remaining is then remitted to the government.
Recently, there have been talks about the end of fuel subsidies. The recently passed Petroleum Industry Act of 2021 gave an 18-month window for the winding down of the subsidy programmes. The federal government intends to stick to this timeline as the 2023 budget only makes provision for fuel subsidies for just six months.
But one of the biggest arguments against the removal has been its impact on people experiencing poverty. In response, the government has been working on several initiatives, including the development of mass transit and the provision of direct cash transfers to “most vulnerable groups”. To achieve this, given that they don’t have the revenue, they did what they do best, borrow. The Government borrowed 800 million USD from the World Bank. This fund, the first in a series, will be given directly to 10 million Nigerian households (about 36,000 Naira per family) or 7200 Naira per person.
So what?
Nigeria's fuel issues are paradoxical for a country that produces crude oil. The removal of subsidies has been a long time coming, but the methods the government has outlined for the transition are not giving.
How does 7,000 Naira cover the most significant issues most people will face? The first is that of transportation costs. Based on our research, road transport workers do not hesitate to transfer the cost of increased fuel prices to travellers. Secondly, electricity, the issue most people face is not that they don’t pay their bills but that they don’t get light. So even if subsidy removal makes on-gird electricity more competitive, people still won’t buy it because it is not just reliable. So that makes their reliable alternative more expensive.
Last is food prices. Most food items are transported by road as Nigeria has a virtually non-existent cargo rail network. So increased transport cost leads to higher food prices.
We know this sounds like they should leave the subsidy, but they should not. The argument is that subsidy removal is hard to stop because it is a stop-gap measure for many systematic failures in Nigeria. This then means that no amount of cash transfers will fix the problem. For example, it would be better to use the 800 million USD to rehabilitate refineries, the National grid, or develop transport infrastructure.
The subsidy was a welfare programme set up to address a structural issue and this cash transfer is no different.