In the month of March, when the impact of the coronavirus pandemic and global oil price crash began to take its toll on the Nigerian economy, the federal government introduced a subsidy on pump price in order to provide palliatives for Nigerians while selling fuel internally.
Crude oil had crashed from $50 per barrel a day to $20 per barrel. As most economies were entering a lockdown mode the demand for oil also dropped. Therefore, the country’s Petroleum Products Pricing and Regulatory Agency (PPPRA) announced the reduction of pump price to N125 from N145, a move that resonated well with most Nigerians.
However, President Muhammadu Buhari on September 1, 2020, announced the removal of subsidy on petrol and electricity in Nigeria. The president said that the move was targetted towards eliminating the mismanagement of taxpayer money and corruption associated with subsidies. This prompted an increase in pump price to N151.56k per litre and an increase in electricity tariff to N62 per kilowatt-hour from N30.
The move has undoubtedly generated mixed reactions from the public, especially from the opposition, as the president announced that there was no going back on the decision. When an economy as peculiar as Nigeria’s decides to remove subsidies on some key sectors, usually some form of resistance by the public is expected because of the temporary hardship that would emerge. Nevertheless, there are countless benefits of subsidy removal which the country will enjoy in the long term.
Nigeria is Africa’s oil largest producer, yet 100 percent of its crude is refined outside its shores with the Nigerian National Petroleum Commission (NNPC) as its key exporter. This is due to the dilapidated nature of its refineries. The country later buys back 70 percent of refined crude at a much higher price. In other to be fair on the populace, the Nigerian government has over the years introduced subsidies on oil products.
Subsidy and how it would benefit Nigerians.
A subsidy is a direct or indirect payment to individuals or firms, usually in the form of cash payment from the government or a targeted tax cut. Subsidies can be used to offset market failures and externalities in order to achieve greater economic efficiency. This means that the government technically gives discounts on fuel and electricity but pays the market from its pocket to balance up for every discount.
For instance, the petrol subsidy was estimated at N101.65 billion in the first three months of the year. This means that the government incurs additional administrative costs in subsidizing the price of the commodity.
But if the oil subsidy is removed, the natural hold of the NNPC on the industry will be curtailed, opening the market for private companies and healthy competition in the economy. When competition for the sale of certain commodities gets tough, players in the market are forced to introduce low prices and discounts in order to gain a bigger market share. It is the involvement of competition that triggers a drop in price that could later impact the economy and all other externalities.
With the removal of subsidy, the government can channel its resources to other infrastructural needs, bringing about growth and development. Also, with the increase in competition necessitated by the latest subsidy removals, there would be an increase in job creation as new companies would have a need for more manpower.