Effect Of Fuel Subsidy On The Economy Of Nigeria

Project and Seminar Material for Business Administration and Management BAM

Abstract

When the researcher chose this topic “effect of fuel subsidy on Nigerian economy”-she was inspired on how Nigerians reacted towards the fuel subsidy, the strikes, violent demonstrations, high cost of fuel and transportation etc, it was these problems that made the researcher carryout this work. To do this, researcher developed three major questions and other sub/minor questions aimed at prying into fuel subsidy and the Nigerian economy. These questions were administered in the form of a questionnaire to 399 respondents who were selected as a sample of the population. Apart from the primary data collected through questionnaire, secondary data were also collected. In organizing and presenting data collected, tables and percentages were used. Data analysis and interpretation revealed the level of impact felt in the sectors of the economy. A high level of impact was felt in health, transportation, education and power sector, a low impact was felt in agriculture, infrastructure and basic amenities, majority of the respondents had no idea of the achieved impact in communicating and no impact was felt at all in tourism. It was therefore recommended that government should pay adequate attention to these sectors of the economy, this should also be supplemented by providing social amenities and infrastructures in the country. If the sectors of the economy are in a very good shape, it will not only go along way in sustaining and reviving other sectors of the economy, it wil also help to hasten growth and development in Nigeria.

Chapter One

Introduction

1.1 Background to the Study

Nigeria is the most populous country in Africa with a 2011population of 162.5 million.It possesses28percentof African provenoil reserves, second after Libya, and it is the top producer of African crude oil, producing 24percentof 2010 African oil production equaling2.4 million barrelsper day(bpd)(UN, 2011). At the same time, Nigeria’s share in world production remained almost constant around three percent. Nigeria ranks among the top 12 world producers of oil in 2011 (BP, 2012). Nigeria started subsidizing its petroleum industry in the 1980’s after the state-owned company, the Nigerian National Petroleum Corporation (NNPC), had planned to unify the price of crude oil in accordance with the global market. But then-incumbent president, Olusegun Obasanjo, said average Nigerians would not be able to afford a gallon of petrol at the pump. Instead, President Obasanjo introduced subsidy plan to keep the price of petrol low.

A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from Government, the term subsidy can relate to any type of support – for example from NGOs or implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates). Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical. The most common forms of subsidies are those to the producer or the consumer. Producer/Production subsidies ensure producers are better off by supplying market price support, direct support, or payments to factors of production.

Consumer/Consumption subsidies commonly reduce the price of goods and services to the consumer. For example, in Nigerian, it was cheaper to buy petrol some years back because of fuel subsidy. Whether subsidies are positive or negative is typically a normative judgment. As a form of economic intervention, subsidies are inherently contrary to the market’s demands. However, they can also be used as tools of political and corporate cronyism. Although subsidies can be important, many are ‘perverse’. To be ‘perverse’, subsidies must exert effects that are demonstrably and significantly adverse both economically and environmentally. A subsidy rarely, if ever, starts perverse, but over time a legitimate efficacious subsidy can become perverse or illegitimate if it is not withdrawn after meeting its goal or as political goals change.

Despite being Africa’s largest oil producer, Nigeria still relies heavily on imported refined oil. Its four refineries Port Harcourt I and II, Warri and Kaduna have a combined capacity of around 445 thousand bpd, which covers 63 percent of domestic demand. However, these refineries are running far below their capacity due to operational failures, poor maintenance, sabotage on crude oil pipelines feeding refineries, theft, and fire (EIA, 2012; Businessday, 2013). In 2009 and part of 2010, particularly low refinery runs forced the country to import about 85 percent of its refined oil needs. Other estimates show the domestic refineries to satisfy a maximum of 25 percent of domestic consumption (Rice, 2012). With the proclaimed objective to alleviate high levels of poverty, the Nigerian government subsidizes private consumption of imported refined fuels to maintain a stabilized price at the consumer pump.

The dollar value of the subsidy increases with increasing refined oil prices or increased import volumes. Rising world fuel prices have caused this subsidy to increase significantly over recent years; damaging the country’s fiscal health and economy (Rice, 2012; BBC 2012a, 2012b). The Nigerian Petroleum Products Pricing Regulatory Agency (PPPRA) determines the daily and monthly subsidy rates as follows: the subsidy is determined daily and monthly by PPPRA based on the gap between the expected price of imported fuel, including margins, and the pre-established, regulated, domestic price. Though the subsidy helps the poor, by keeping Nigerian prices lower than world prices, the biggest beneficiaries have been importing companies and local wholesalers (The Economist, 2011)that smuggle some of the subsidized fuel into neighboring countries and sell it at higher prices (The Economist, 2012). Illegal trade is not well recorded in official trade statistics, which makes it difficult to analyze.

According to the BBC (2012a, b), however, the Nigerian government paid the subsidy on 59 million liters of fuel a day in 2011, although domestic consumption in Nigeria was approximately 35 million liters a day. Thus, fuel importers were paid hundreds of millions of US dollars to import fuel that was never delivered to the Nigerian people. For the past 30 years, governments have attempted to remove the fuel subsidy due to the damaging fiscal impact (Adenikinju, 2009). From a political economy perspective, subsidy removal is difficult because it impacts a broad spectrum of Nigerian households. Despite the majority of the subsidies benefiting wealthier households, lower and less volatile fuel prices are popular to all population segments. For these reasons, attempts to remove the subsidy have always generated opposition from consumers. Moreover, there is the presumption that any price increase will fuel inflation and reduce economic welfare (Adenikinju, 2009).

1.2 Statement of the Problem

Nigeria is not a special case regarding its refined fuel subsidies. Governments of other countries do spend several billion dollars on various sectors subsidies. However, fuel subsidies have proven to disproportionally benefit wealthier citizens that consume relatively larger amounts of fuel to power their autos and homes. For several years now, fuel subsidy has been proven to have fraudulently siphoned several billions of dollars from the Nigeria treasury. Therefore, the study is examining the effect of fuel subsidy on the economy of Nigeria. According to World Bank (2009), if fuel were not subsidized, Nigeria government should also encourage investors and firms to invest in activities that would be unprofitable.

1.3 Objectives of the Study

The following are the objectives of this study:

To examine the effect of fuel subsidy on the economy of Nigeria.
To identify the advantages of fuel subsidy to Nigerians.
To determine the disadvantages of fuel subsidy.

1.4 Research Questions

What is the effect of fuel subsidy on the economy of Nigeria?
What are the advantages of fuel subsidy to Nigerians?
What are the disadvantages of fuel subsidy?

1.5 Hypothesis

HO: Fuel subsidy does not promote Nigerian economy

HA: Fuel subsidy does promote Nigerian economy

1.5 Scope of Study

This study is limited to the economic implications of fuel subsidy payment in Nigeria

1.6 Limitation of the Study

In this research work like every other purposeful act, it was met with many obstacles in the gathering of information the major problem encountered by the researcher is the limited time given within which to gather and analyse data because this topic is based on current issues in our society. Also the researcher was faced with the problem of finance as well as the negative attitude and non- coperation of the respondents to give information to the researcher. Also, there is the problem of transportation from one place to another. Other problems include physical problems such as energy used in carrying out this work and it was carried out when normal school activities were on, the researcher devoted more time in order to meet up with the time limit for the submission of this work. Another problem the researcher encountered was lack of textbooks because this research work is a current issue in Nigeria, people have not written any text books on it, the researcher had to reach on journal, magazines, newspaper and the internet.

1.7 Significance of the Study

The following are the significance of this study:

The findings from this study will educate the Nigerian general public on the effect of fuel subsidy on the Nigerian economy. It will also enlighten the public on the pros and cons of fuel subsidy.
This research will be a contribution to the body of literature in the area of the effect of personality trait on student’s academic performance, thereby constituting the empirical literature for future research in the subject area.

1.8 Definition of Terms

Impact

Consequences, outcome, reparations

Fuel subsidy

The amount of money that the government pay to the cabals or fuel importers while importing fuel so the price of fuel will be cheaper for the people to purchase

Removal

Elimination, withdrawal or taking away

Nigerian Economy

The wealth, resources financial system of Nigeria

Subsidy

Any measure that keep prices consumer pay for a good or produce below market price for consumer or for producer

Regime

A period of existence of something

Chapter Five

Findings, Conclusions and Recommendations

5.1 Findings

In the course or process of this research, the researcher observed from the numerous respondents that the subsidy on fuel which the federal government introduced was not useful to a majority of Nigerians because it did not benefit the masses. Thou majority of Nigerians did not benefit from the subsidy but they were able to buy/purchase fuel at a cheaper rate during the subsidy regime. The researcher also found out that it was the cabals whom the fuel subsidy was made available for. In the process of this research, the researcher also discovered that other sectors of the economy such as the agricultural sector, communication sector, educational sector, etc were highly neglected during the subsidy regime.

The researcher also observed that the federal government was reasonable enough in removing subsidy on fuel with the sole aim of developing other sectors of the economy, with the belief that the result of the removal will generate employment opportunities for Nigerians, stop Nigerians from importing fuel from other countries, attract foreign investors in the downstream sector of the economy and also to recover and sustain other sectors of the economy. Finally, the researcher also found out that the removal of subsidy on fuel has a high impact on the health, transportation, education and power sectors of the economy, a low impact was felt in the agricultural sector, infrastructures and social amenities. The researcher also noticed that majority of the respondents had no idea of the achieved impact on communication and that no impact was felt at all in tourism.

The researcher also observed that there is a great disappointment and a high level of mistrust among the populace because Jonathan‟s presidency/regime has not proved to be different from other regimes in terms of sincerity and honesty. The federal government promised to use the money that accrued from the fuel subsidy removal to develop other sectors of the economy but majority of Nigerians are protesting against the policy of fuel subsidy removal not because they don‟t know its importance in the long run, but because of their experience with past government. This is not the first time Nigerians are hearing of the word “subsidy removal”. Nigeria government have removed subsidy on kerosine, diesel and fuel but then the story still remains the same. Nigerians believe that the government will use the money that were accrued from fuel subsidy removal for their own selfish interest and not for the benefit of the masses. The people also agitated that Jonathan did not mention anything about fuel subsidy removal all his month of campaigning for the presidential office, only to introduce it immediately he was declared winner of the election.
During the period of fuel subsidy, some major players in the petroleum sectors shared a huge sum of money all in the name of importing refined petroleum products into the country (Nigeria), some companies in the downstream sector shared over #1.428 trillion between January and August 2011 alone (nation newspaper 2012:71). Oando oil, conoil, African petroleum and Mrs oil are among powerful players in the petroleum sector. However the corruption in the oil sectors by the cabals has brought more hardship to the poor Nigerian masses by the sudden removal of subsidy on fuel and deregulation of the downstream sector of the economy. Finally the policy was well formulated but poorly implemented and executed.

5.2 Conclusion

A majority of Nigerians accepted the fuel subsidy removal because they were not actually the ones benefiting from it. It was the hope of the masses that the government would use the money that accrued from the removal of subsidy on fuel to develop other sectors of the economy from which the masses could benefit. The people agitated against the removal of subsidy on fuel not because they did not know its importance and what they would benefit from it in the long run, but because of the high level of mistrust they had in government and also the wrong timing and execution of the policy. Since the fuel subsidy removal has come to stay, the people are now asking that the government should provide palliatives measures that would help cushion the adverse effects in the short run. In summary the removal of fuel subsidy will be good for Nigerians and if properly applied would go a long way in reviving and sustaining the other sectors of the economy.

5.3 Recommendations

Government should identify areas of wastages in governance such as the allocation of largesse and booties in the name of allowance. The government should also try and adjust and reproioritize the proposed spending in the 2012 bedget to fund fuel subsidy, and in a way that addresses social needs and improve the well being of all citizens:
The palliatives should have been put in place before removing subsidy on fuel in other to help cushion the adverse effect of the subsidy removal, and the government should try and implement the N18,000 minimum wage which the president signed into law at the heal of elections.

Deregulation can also be attained in phases/stages, that is the current increment can be spread over period of six years or more.

The various law enforcement agencies such as the ICPC and EFCC should be fully empowered and well funded to perform effectively and again the cabals that constitutes the beneficiaries of the fuel subsidy that held the country and its economy to ransom should be identified and be brought to book immediately.

The federal government of Nigeria should address and adequately develop other sectors of the economy such as the educational,agricultural,communication,transportation,tourism,heath,provision of social amenties and infrastmeture, which will go a long way in providing employment opportunity and raise the standard of living of the people.

The above panacea will go a long way to resolve the hardship in Nigeria and rest the issue of subsidy removal finally.

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