Fuel Subsidy Removal And National Development In Nigeria

CHAPTER ONE

Introduction

1.1        Background of the Study

Subsidy has been defined as aids directly granted by government to an individual or

private commercial enterprise deemed beneficial to the public.           It is also a grant or gift of

money from a government to a private company, organization, or charity to help it function.

In relation to fuel in Nigeria, it means the financial aid granted to autonomous and foremost

oil marketers by the government for them to supply their products at a cheaper rate for the

good of the masses. This move is almost always aimed at boosting the economy of a country,

providing  social          amenities         for  the  people,           stabilizing  the  market,  creating  employment

opportunities and of course the assumption by the government that it is capable of fighting

corruption. The Nigeria Extractive Industries Transparency Initiative (NEITI, 2011) notes

that the issue of subsidy is not alien to the nation’s blood stream because it existed during the

military regime when the four refineries of the nation could only produce little which could

not even satisfy the domestic needs of the people.

Subsidy, in economic sense, exists when consumers of a given commodity are assisted by the government to pay less than the prevailing market price. In relation to fuel subsidy, it means that consumers would pay less than the pump price per litre of products. More so, fuel subsidy could be described as the difference between the actual market price of petroleum products per litre and what the final consumers pay for those same products.

Indeed,  developing  countries  have  used  petroleum  products  or  fuel  subsidies  for

consumers primarily as a means of achieving certain social, economic, and environmental

objectives, as identified by Bazilian and Onyeji, (2012). These include alleviating energy

poverty            and      improving        equity,increasing        domestic          supply,national            resource   wealth

redistribution, correction of externalities and controlling inflation.

Subsidies  were  introduced  in  the  Nigerian  petroleum  sector  in  the  mid  1980’s.

Something of a creeping phenomenon, the value of the subsidies has gone from 1 billion

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Naira in the 1980s to an expected 6 billion Dollars in 2011. Nigeria is a country endowed with vast mineral resources prominent among which are the oil 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 2.4 million barrels per day in 2010 which is about 24% of the continent’s petroleum (Siddig, et al, 2013). In addition, Nigeria has four refineries with an installed production capacity of 445,000 barrels of fuel per day, adequate to meet its domestic needs with a surplus for export (Explore, 2011). However, Nigeria is a large net importer of fuel and other petroleum products. In spite of efforts to revamp her economy via various reforms, which includes comprehensive non-oil export diversification initiatives, petroleum still contributes an average of 95% of the nation's external earnings (Majekodunmi, 2013). The country increasingly relies on imported petroleum products because the existing refineries are producing below 20% of their installed capacity. In fact, the cost of importing petroleum products has risen so rapidly in recent years that the country’s capital expenditures and balance of payment are under threat (Adelabu, 2012).

According to Majekodunmi (2013), for five decades now, Nigeria’s economic growth and other related activities, (including living standards) have largely been influenced by the oil industry. The view that the economy is heavily dependent on the oil industry will amount to an understatement as the oil industry is nothing short of the life-blood of the Nigerian economy (Adelabu, 2012). The International Monetary Fund (IMF, 2013) indicates that Nigeria is the largest oil producing country in Africa and the sixth in the world. The country’s economic strength is derived largely from its oil and gas wealth, which contributes about 99 percent of government revenues and 38.8 percent of GDP (National Budget, 2010). Despite these positive developments, successive governments in Nigeria have been unable to use the oil resources to significantly reduce poverty, provide basic social and economic services for her citizens (Ering and Akpan, 2012).

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Fuel subsidy was, before the coming of the Goodluck Jonathan’s administration, a policy of the federal government meant to assist the people of Nigeria to cushion the effects of economic hardship. However, the controversy over the removal of fuel subsidy was sparked off in June 2011 at the instance of Nigeria Governors' Forum, which includes governors of the 36 federating states in Nigeria. The Forum visited President Jonathan in the wake of the national debate over the payment of the new N18,000 minimum wage. The governors pleaded their inability to pay the new wage bill and suggested the removal of fuel subsidy to ensure that more money accrues to the Federation Account, which will in turn be shared among the three tiers being federal, state and local governments. Nevertheless, the Chairman of the Forum, Governor Chubuike Amaechi of Rivers State later stated that contrary to the prevailing notion that the Governors' support for the removal of fuel subsidy is hinged on their inability to pay the new minimum wage, they wanted it removed because only a few people were benefitting from the subsidies. He added that “with billions spent on fuel importation and we are not seeing the fuel, refineries are not in place … if we remove the subsidy, then people will establish refineries … the refineries will employ people and make fuel available (Social Action 2013:1).

The debate over subsidies was further fuelled on the 4 of October 2011 when President Goodluck Jonathan forwarded to the National Assembly [Senate and House of Representatives] the 2012-2015 Medium Term Expenditure Framework, and the 2012 Fiscal Strategy Paper. Among other issues, the documents proposed to phase out subsidy on fuel beginning in 2012. According to the President, this will make available about N1.2 trillion - some of which will be available for use in creating safety nets for the poor who will be adversely affected by the removal of the subsidy, and also go into the establishment of 'critical infrastructure'.

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Fuel subsidy removal, which the federal government has effectively canvassed and lobbied for since May 29, 2011 appear to finally take off on December 12, 2011. This is when the National Economic Council (NEC) headed by Vice President Namadi Sambo decided that the government should finally remove the subsidy from January 2012. By January 2012, there were revelations that amount expended on fuel subsidies in 2011 was much higher than what the government was keen to admit. While it has been estimated that government expenditure for this purpose was about N561 billion in 2010, the figure, at least, tripled in 2011 though there was no substantial increase in fuel consumption between the periods.

An interesting matter from the economy is the issue of fuel subsidy removal, which has been a great controversy for Nigerians. The issue of fuel subsidy removal has been on in Nigeria for some decades of which different governments have tried to implement the reform but were unsuccessful due to fierce public demonstration of disapproval. This has often led to mass protests by the citizens and the civil society who regard such policy as a measure to further subjugate and impoverish the masses. Notwithstanding, it seems that the longer the subsidies have existed, the more entrenched the opposition to reduce them. It is against this backdrop that this study investigates the effect of fuel subsidy removal on national development in Nigeria, with emphasis on the period between 1999 and 2012. To this end, it aims to determine if the incremental increases in the pump price of fuel undermine the living standard of Nigerians. More so, the study seeks to establish if the fuel subsidy probe has improved national revenue accounting. Finally, the research will determine if mass protests that accompany fuel price increases undermine the economic stability of Nigeria.

1.2        Statement of the Problem

The issue of fuel crisis has become a common phenomenon in Nigeria. There is hardly any issue that draws more emotion across all strata of the Nigerian society than fuel

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subsidy. The problem of fuel subsidy has led to a great debate in Nigeria. Much as subsidy is an economic necessity, the discussion over its impact on the masses and desirability in Nigeria remains unresolved. This question is necessary because the government argues that withdrawing the subsidy programme will enable it to have more money at the expense of the citizens, who contend that if there is subsidy removal, they stand to benefit nothing from the government. The position of the government for the removal of fuel subsidy in Nigeria is based on the premise that it will use the money realized to provide infrastructures. To the other side of the debate it seems this has never been achieved despite several increases in pump price of petroleum products between 1999 and 2012. This culminated to the formation of Subsidy Reinvestment Programme (SURE-P) to manage the funds accrued from the subsidy removal (Alwell, 2012).

However, despite the attempts by successive government to bring an end to fuel subsidy in Nigeria through price increases since 1999, there appears to be no empirical evidence to show its beneficial effect on the living standard of Nigerians. The upward adjustments of petroleum products have resulted in inflation, high cost of living, and inequitable distribution of income in Nigeria. Between 1978 and 2012, the various government regimes have changed the fuel prices for a total number of 23 times. Most of the increase occurred in the 1990-2012 period when petroleum products prices were adjusted upwards sometimes twice in one year. One major problem this has caused was the instability of the prices of goods and services in the country. Whenever there is an increase in prices of petroleum products in Nigeria, it affects transportation, cost of goods and other services. The cost of the fuel subsidy continues to expose the citizens to untold hard-ship due to rising cost of fuel as well as transportation which indirectly affect food prices. A survey showed that from 2012, the prices of fruits such as oranges, pineapples, banana, and apples have risen. Cost of frozen chicken, vegetable oil and other food items sky-rocketed, this survey was done

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within the first month of subsidy removal (Harambe, 2012). There is therefore the need to undertake empirical study of this nature to determine the effects of fuel subsidy on national development in Nigeria between 1999 and 2012. The concomitant effects of fuel price increment, probes and protests in relation to national development buttressed by living standards, revenue accounting and economic stability, appear to be lacking in incremental systematic treatment of their relatedness, complexity and utility maximization in public choice analysis. To this end, the research seeks to investigate the following questions:

1.     Does the incremental increases in the pump price of fuel undermine the living standard of Nigerians?

2.     Has the fuel subsidy probe improved national revenue accounting in Nigeria?

3.     Did the mass protests that accompanied fuel price increases undermine the economic stability of Nigeria?

1.3        Objectives of the study

The broad objective of the study is to investigate the effect of fuel subsidy removal on national development in Nigeria between 1999 and 2012. However, the specific objectives are:

1.     To determine if the incremental increases in the pump price of fuel undermine the living standard of Nigerians;

2.     To ascertain if fuel subsidy probe improved on national revenue accounting in Nigeria; and

3.     To establish if the mass protests that accompany fuel price increases undermined the economic stability of Nigeria

1.4        Significance of the Study

The study has theoretical and practical significance. Theoretically, it investigates fuel subsidy and national development in Nigeria between 1999 and 2012. it is apparent from the

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