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Guest Post: Nigeria’s Fuel Subsidy Is More than Economics

by Michael Levi
December 21, 2011

Nigerian workers in protest in Lagos March 21, 2001. (George Esiri/Courtesy Reuters)

Many readers of this blog will be familiar with the pernicious consequences of fossil fuel subsidies — and how difficult it is to get rid of them. My colleague John Campbell, a former U.S. ambassador to Nigeria, examines Nigerian President Goodluck Jonathan’s recent decision to remove the country’s fuel subsidy, and what this means for Nigeria’s people and economy. His post from his blog, Africa In Transition, is reposted below.

Nigeria has long subsidized fuel for its citizens. The cost of the subsidy is high, and economists and the international financial institutions have argued for many years that it significantly distorts the economy. Since the establishment of civilian government in 1999, consecutive presidents have sought to reduce or eliminate the subsidy. But such efforts have been scaled back or abandoned because of deep popular opposition. On occasion, proposals for curtailing the subsidy has led to strikes and serious riots in urban areas, such as Lagos.

In the budget for the coming year, President Goodluck Jonathan has left out the fuel subsidy—thereby abolishing it. Predictably, the house of representatives has demanded that the subsidy be returned to the budget. In the senate, some members are arguing that the budget is too high for the military and security services. The implication seems to be that if it were reduced, money might be found to continue to subsidize fuel. In any event, the debate is not yet over.

With Boko Haram in the North, the prospect of renewed militant activity in the Delta, and lack of security in Plateau state, why has the government decided to tackle a reform as difficult and contentious as the fuel subsidy now? The answer appears to be the prospect that the government could be short of money. Jonathan said that the fuel subsidy cost the government N1.2 trillion this year.

Eliminating or reducing the fuel subsidy –which covers kerosene as well as gas and oil—would have a ripple effect throughout the entire economy. Prices for a wide range of goods beyond fuel would likely increase. Outside Lagos and Abuja most of the population is impoverished, and reduction or elimination of the subsidy will have serious consequences for those individuals. Further, there is a moral dimension. The fuel subsidy is the principal way ordinary Nigerians benefit from the country’s oil wealth. The Roman Catholic archbishop of Abuja and former head of the Christian Association of Nigeria observes that the subsidy is a tiny resource transfer to the Nigerian people, who otherwise receive little or nothing from the current political economy. It is, therefore, morally justified, “no matter what the World Bank says.” (Notably, the most recent statement from the World Bank says that Nigeria should focus on fuel supply, not necessarily the fuel subsidy.)

Given such considerations, it is likely that the Nigerian federal government will seek to reduce, rather than eliminate, the fuel subsidy. If it does so, the challenge will be find a point that helps the government’s bottom line without driving people into the streets.

Post a Comment 2 Comments

  • Posted by Jude Orji

    Nice short summary except that I would elaborate on “The fuel subsidy is the principal way ordinary Nigerians benefit from the country’s oil wealth.” If Nigerian goverment functioned like most governments of the world where accountability is observed and monitored, Nigerians would have no problem giving up the subsidy. However, Nigeria is almost synonymous with the word “corruption.” From the presidency and elected officials to the civil servant through the security services (especially the police) corruption is the language of operation. You may not enter any government office in Nigeria for any official business without either being asked to pay some bribe or being made to pay some bribe. Our Nigeria is marked by Inflated contracts, favoritism, nepotism, tribalism, cronism, gratification demands to perform basic employment obligations, extortions by the security, abuses by academic staff, rape by academic staff, near zero-accountability and ill transparency, and general decadence. As such, the only aspect of collective wealth that trickles down to over 90% of Nigerians is the so-called fuel subsidy – which has been reduced over the years by successive governments (everyone one of them making the case that the country’s survival depended on such removal – even as the country trunces down to the next level of degeneration). So, yes, nice summary Mr. Campbell, except that CORRUPTION should have been the focal point of your discuss or any discuss on the subsidy matter.

  • Posted by jide.olateju

    Ambassador Campbell’s continuous interest in Nigeria is commendable. He has chosen not to take the easy path of cozying up to the Nigerian government by saying what they want to hear, and possibly earning millions of easy dollars in consulting and public relations fees. On the contrary, he analyses, warns, admonishes with the passion of a native son rather than a short-term guest.
    There are a however a few corrections that should be made to his brilliant analysis.
    • Subsidy payments were only included in the budget as a one-time experiments in 2010. Prior to that, they were an extra-budgetary payment from the excess-crude and other reserves to the tune of $6-$9 billion a year.
    • Only a tiny fractions of the amounts spent of subsidies (less than 20% by my estimate) go to benefit the poor in Nigeria. Large portions of it are accounting fraud by the National Oil company & their backers in Government, over-invoicing by importers of refined products, smuggling by local marketers, and benefits by wealthy Nigerians (with 3-6 cars, and large power generators for their homes and offices). Very little trickles down to the masses commute by buses. The good bishop needs to realize that they are inadvertently fighting for the rich and corrupt.
    • A partial removal of the subsidies would be nonsensical. The problem is not the amount of subsidies, but the corruption inherent in the institutions and execution of the subsidy program.
    It might interest you to note that we were making the case for the removal of subsidies, the greatest opponents were the National Oil Company, core elements of the current government and the Labor Unions. A Partnership that has perverted reforms needed to revive Nigeria’s downstream sector, and continues to deceive the Nigerian public.

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