FUEL SUBSIDY REMOVAL: PROSPECTS AND CHALLENGES ON THE NIGERIAN ECONOMY

ABSTRACT

For some years now, one of the most taunting and complex socio-economic policy issues in Nigeria remains the issue of Fuel subsidy removal. The decision by the government to out rightly remove the subsidy on fuel ignited series of arguments and protests nation-wide. Despite the global reduction in the price of oil, Nigeria experiences high price of oil. This study examines the prospects and the challenges of fuel subsidy removal on the Nigerian economy. The methodology employed is the Anova statistics which was applied to test the hypotheses stated in the study at 0.05 significant level. The results obtained showed that fuel subsidy removal affects the cost of living, reduces the consumption pattern, savings and investment level of the people and that it is a plague to the Nigerian economy and her people. As a result, it is recommended in this study that the widespread of corruption embedded in the system should be eradicated and be dealt with it, appropriately through transparent fiscal operation. To diversify the economy by embracing agricultural production of our food stables instead of importing them likewise, Nigeria to build more refineries and the major refineries should work in full capacity. These programme are growth prospects that will brighten the Nigerian economy and her people in the nearest future.

CHAPTER ONE

INTRODUCTION

1.1    Background to the Study

Nigeria is a country endowed with vast mineral resources prominent among which are the oils and gas reserves. The country possesses 28% of Africa’s proven oil reserves, second only to Libya; and is the largest producer of crude oil in the region, producing 2.4million barrels per day in 2010 which is about 24% of the continent’s petroleum (Siddig et al.,2014). One of the contentious issues in Nigeria today is the removal of fuel subsidy on Premium Motor spirit (PMS) (Akinwale etal.,2013).

Despite the enormous revenue Nigeria derives from oil, the benefit has not reflected in the lives of ordinary citizens in the country and this has not translated into an improved economy for the country. Rather, through inefficiencies, corruption, abuse of natural monopoly powers, mismanagement, smuggling, bureaucratic bottlenecks and excessive subsidy, the supply of refined crude oil in the country has virtually collapsed (Ibanga, 2011).

Fuel subsidy reform is increasingly seen as an opportunity for consolidating public finances and fostering sustainable economic development. One of the crucial issues of energy market in oil exporting developing countries is the high level of subsidies on petroleum products and low efficiency in energy use. In spite of cumulative efforts by successive governments, oil subsidy remains one of the most intricate socio-economic policy issues in Nigeria (Adenikinju, 2009).

Fuel subsidy is the cost borne by government to cushion the impact of high pump price of petroleum product on the citizenry. International Energy Agency (IEA, 1999), defines energy subsidy as any government action that concerns primarily the oil sector, that lowers the cost of energy production, raises the price received by producers or lowers the price paid by energy consumers. While it is a commendable gesture in terms of provision of welfare by the government, it may not hold much impact economically.

Hence, while many Nigerians agree and believe that the removal of fuel subsidy remains a more viable economic option, the inability of the government to process its crude oil in the country coupled with the apparent inefficiencies, corruption, mismanagement and smuggling in the oil sector has made fuel subsidy removal an acceptable option.

Attempts by successive governments to remove the subsidy have generated oppositions from consumers already used to cheap energy price in the market due to the presumptions that any price increase will fuel inflation and reduce economic welfare (Ibanga, 2011; Adenikinju, 2009).

The proposals by the government do ignite a fierce debate with the representatives of the government insisting on the outright removal of the fuel subsidy while many non-governmental individuals (NGI) and civil society organizations (CSO) and labour unions are vehemently opposing to the idea. Unfortunately, as in the past, the federal government and its agencies have not done a good job in presenting or “selling” their case to the National Assembly and the general public (Ojameruaye, 2011). It is against this backdrop that this study looks into the prospects and the challenges of fuel subsidy removal on the Nigerian economy.

1.2    Statement of the Problem

The controversy generated among Nigerians as a result of the declaration by the federal government on the removal of fuel subsidy suggests that there is a puzzle to be solved in the Nigerian fuel subsidy issue. Consequently, certain questions need to be asked on this phenomenon. What is the rationale behind its removal? To what extent will the removal of this subsidy improve the fiscal policy of the government? Does the removal of fuel subsidy have any effect on the economic condition of the country? What are the gains and the pains of its removal on the economy of Nigeria?

1.3    Aims of the Study

The broad aims of this study was to analyse the prospects and the challenges of the fuel subsidy removal on the Nigerian economy.

1.4    Objectives of the Study

The specific objectives of this research work includes:

1. to examine the effects of fuel subsidy on the average cost of living
2. to examine if the capacity level of refineries can meet the nation’s domestic demand for oil, and
3. to analyse the prospects and the challenges of fuel subsidy removal in Nigeria.

1.5    Hypotheses of the Study

Three hypotheses stated in null forms were tested and analyzed in this study. They are:

Hypothesis I: Fuel subsidy removal does not affect the average cost of living.

Hypothesis II: The current capacity level of refineries cannot meet the nation’s domestic demand for oil.

Hypothesis III: Fuel subsidy removal is not a plague to the Nigerian economy.

1.6    Justification for the Study

The issue of fuel subsidy removal has often been a taunting and controversial public policy issue in Nigeria for some years now. Successive governments have struggled with this problem. Since the declaration by the present administration to completely remove the fuel subsidy, contributions in form of articles and write-ups of different kinds abound most of which are politically inclined and generally biased without putting basic facts into consideration. (Ojameruaye 2011) posits that some of the misunderstanding about the fuel subsidy removal issue would have been clarified or resolved if most proponents and opponents had put on the “economic thinking” hat in making their case for or against the fuel subsidy and if they had a clear understanding of the concept of subsidy.

In addition, this study would enhance the policy formulation of the government especially in the downstream oil sector of the economy and help reduce the ignorance of some on the fuel subsidy issue

Finally, it would contribute to existing literatures on the subject matter and serves as an invaluable tool for students, academic institutions and individuals who would like to know about the issues of fuel subsidy in Nigeria.

1.7    Scope of the Study

This study sought to address the implications of the removal of fuel subsidy on the economy of Nigeria. The study is however centred on some specific occupations in Akure (Ondo state metropolis) and particular emphasis were laid on the oil sector, salary earners, traders (transporters), artisans, business men and women, students and productivity sector.

1.8    Outline of the Study

The study was grouped into five chapters. Chapter one focused on the introductory aspect and guides to the study. Chapter two presented the literature review on the subject matter. Methodology adopted in the study was stated in Chapter three. Chapter four presented the data, results and the findings of the study. Finally, chapter five gave the summary, conclusion and appropriate recommendations based on the findings from the study.