FUEL SUBSIDY REMOVAL: CUMULATIVE IMPACT AND THE WAY FORWARD.
Since its discovery in 1956, Crude oil had remained an imposing figure on the monolithic terrain of Nigeria's economy. Virtually, all sectors of the economy derives support from this essential commodity, hence, any hiccups experienced by it will eventually take its toll on every one of them. Nigeria's sole dependence on oil as mainstay for the economy has however affected the health of her economy, as the price of *Brent*, the benchmark against which the Nigerian crude oil is priced at the world market keeps diving into a steady decline, as of November 4 2020, Brent is priced at 37.75 dollars per barrel. The Problem started when the United States reduced their demand for Nigeria's oil in 2015 and this ushered Nigeria into recession in 2016, and in the latest reports from the National bureau of Statistics(NBS) issued on November 21, the economy seems to be back into recession as the Gross domestic product(GDP) contracted twice by 6.1% in the second quarter and 3.62% in the third quarter of 2020 fiscal year.
The Federal government has however resorted into removing the subsidy on Petrol, all in a bid to strengthen the ailing foreign reserve. This will play out in the sense that the savings accrued from subsidy removal will be used in boosting the foreign reserve. However, as useful as this policy seems, if implemented at the wrong time and for the inappropriate purpose, it could stifle the livelihood of many citizens within that economy.
Subsidy, as it is widely known, is reverse tax. According to the Academics Dictionary of Economics (2006) defined subsidy – “The cash incentive given by the government to an industry with a view to lower the price of the product of the concerned industry and to raise its competitive power is known as subsidy. This may be given as a counter balancing measure to the imposition of the duty (In the nature of protection duty) by an importing country government. One important objective of subsidy is keep its prices below the cost of production.” Subsidies have direct impact on price. Thus, there are two major classes of subsidies – production which is associated with developed countries and;Consumer subsidies, which are found mainly in developing countries like Nigeria.
President Buhari, while presenting the 2021 Appropriation bill to the National Assembly, had noted that one of the ways through which his administration seek to cut leakages of public funds and in turn, source income to fund the proposed budget was to implement fuel subsidy removal and a complete deregulation of the Petroleum downstream sector.
A major problem that Nigeria's petroleum sector faces is a poor pricing system, where the product is bought for a cheaper price in Nigeria and then, sold to neighbouring countries at higher prices in order to gain supernormal profits. This had often resulted in the shortage of fuel as well as the long queues at the filling stations, this can only be attributed to bad management on the part of NNPC and subsidy removal isn't the solution to that in any way.
Subsidy is the major way by which low income earners are enabled to afford petroleum products, as they are equally enabled to contribute their own quota in developing the economy but in a case where the purchasing power of the middle class is being trimmed down as a result of skyrocketed prices of products, the cost of services being injected into the Economy by the middle class increases, thus, retrogression sets in on growth and development. Sadly, the middle class become eroded, the poor become poorer and the rich get supernormal profits.
Three major areas have been Identified by Stephen I. Ocheni in his article; "Impact of fuel price increase on the Nigerian Economy" published by the Mediterranean journal of Social sciences, Rome, Italy. In this article, it was noted that subsidy removal will have effects on; Purchasing power, Nigeria's balance of payment and Food security in Nigeria.These trio are the cardinal drivers of Economic growth in any country and if they are adversely affected in any way, it could spell doom for the Economy.
Increasing the price of fuel will only reduce the purchasing power of the citizenry. The major area to be affected by this policy is the transportation business because as fuel prices increases, transporters will seek to maximise profit by reviewing the transport fare. Suppose, a man earns #360 per day, such is likely to dedicate 50% of his daily income on transportation cost. Thus, the ability of the low income earners to save is taken away and this further dampens on the negative effects that subsidy removal had already had on them, as this will erode the power of the middle class to contribute meaningfully to the economy.
It should be noted that companies will incur more cost in the process of production; the price of the materials being used for production would have skyrocketed, transportation cost already increased, energy cost would have equally increased as electricity is generated by fuel powered turbine driven generators, this will in turn have direct impact on the citizens, as the firms will push the costs on the consumers, as the price of products might increase with the quality reducing at thesame time. This would also lead to massive job losses, as firms will downsize the workforce in order to maximize profits,due to increased cost of production.
The cost of living is also bound to increase because as the energy and transportation costs soars, it comes down on the prices of various goods and materials. The current market price of onions now is unbelievable, likewise for building materials, especially cement, which had moved up to over #3000. This also reflects on school fees, House rent, electricity bills among others.
Corruption which had earlier become domiciled in the oil sector will be on the rise. A phenomenal feature of fuel subsidy removal is the proliferation of black markets, where this commodity will be possibly sold at arbitrary prices, customers are at risk of buying adulterated fuel and the community is exposed to a possible fire accident as people tend to store petroleum products under their roofs.
Further, Stephen Ocheni opined in the Mediterranean Journal of social sciences, " Removal of fuel subsidy and devaluation of the naira would render the salaries received by civil/public servants at all levels inadequate. The tendency is that corruption, which the government has proved incapable of fighting, would increase. This has always been the case and there is no reason why this will not happen. I make bold to say that removal of fuel subsidy would not guarantee the construction of refineries by private Companies for two reasons. First, if marketers (and this includes the companies that have been licensed to build (refineries) import fuel and sell on the basis of the bogus PPPRA template when subsidy is removed, nothing will encourage them to build refineries. This is because they will make much more money through importation than they would by refining crude oil. Secondly, constructing new refineries would cost much more when fuel subsidy is removed and the naira devalued. That will also be a disincentive to building new refineries"
Recently, there were reports that the Federal government is planning of importing oil from Niger Republic.This is an action that will loom large on Nigeria's economy in a negative way as this will lead to accumulated balance of payment deficits. Foreign investors will also be scared from investing in Nigeria because the Naira is of lesser value. In thesame vein, importers of foreign goods will incur more cost to import into the country because of financial instability of the Naira, its comparative weakness and inability to compete at the world market.
In light of Nigeria's second successive plunge into recession in five years, wise recommendations have been issued by well meaning Nigerians including, former vice president Atiku Abubakar, Pat Utomi and a host of others. The federal government have been advised to reduce the cost of governance and review the 2021 appropriation bill before it is passed into law, government has also been advised to reduce tax on essential commodities like food and building materials while increasing the tax on luxury goods. The recent reduction in import duties on tractors and some essential goods, as well as the proposed exemption of minimum wage earners from tax payment are welcome developments.
Stephen Ocheni also gave these recommendations at the close of his article:
i.Government should retain fuel subsidy while expediting the construction of the three proposed refineries.
ii. Fuel subsidy should be removed as soon as these new refineries are commissioned.
iii. The proposed rehabilitation of the existing refineries should be expedited.
iv. Government should vigorously pursue the revitalization of the railways. If only Nigerians had alternative to road transport, all this noise about fuel subsidy removal would not have been there.
v. Private companies should be encouraged to start building refineries now with the assurance that subsidy would be removed before they start production.
vi. Government should embark on full deregulation of fuel prices to ensure market competitiveness.
vii. Government should outlaw or legislate against unauthorized dealership in the sale and distribution of petroleum products to reduce the hazards of extortion, unwarranted fire incidence leading to colossal economic loss and loss of life during periods of fuel scarcity and fuel price hike.
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