Despite their widespread implementation, there are virtually no quantitative assessments of their distributional incidence, making it impossible to determine if the fuel subsidy instruments are pro-poor.
Last week, we discussed just how much strain fuel subsidies place on the financial planning of the government. Not just in Nigeria but in other sovereign states offering fuel subsidy.
We highlighted that while the idea remains economically detrimental, it has become a political necessity in Nigeria.
In order to ensure that the removal of subsidies won’t have detrimental repercussions on the country, the FG must take the necessary precautions and put in place the appropriate infrastructure as part of its effort to eliminate gasoline subsidies from the system.
Given that the governmental goal of subsidies is to enhance the welfare of the most vulnerable, it is crucial to integrate social concerns into broader measures to combat poverty.
More than 82 million people, or 40% of Nigerians, live on less than $1 a day, according to the National Bureau of Statistics. These guys here have no concerns about fuel subsidy.
Since the ripple effect of fuel subsidy has only been felt on the negative end (bringing economic strain to fiscal planning) rather than the positive end (low transport costs and a fall in the price of by-products), the federal government may look to invest in socially demanded services.
Subsidy Breeds Inequality
The World Bank has been urging Nigeria to end the fuel subsidy in recent years. It makes the case that doing nothing would make the nation’s fiscal problems and debt profile worse. The subsidies would be eliminated as of June 2023, according to the departing administration.
As an economist, I think that fuel subsidies lack a clear economic foundation in addition to being unjust and unsustainable.
As upper-income households get the most from subsidies because they consume the most fuel, they serve to further entrench inequality. Nigeria has the largest number of car owners, especially gas-guzzlers.
According to numerous sources, the subsidy program resulted in opaque, dubious, and large payments to numerous participants in the fuel marketing chain. For instance, the government spent more on subsidies in 2011 than it had planned, spending 2.2 trillion (USD 14.0 billion) vs. a budget of 422 billion (USD 2.7 billion).
The current 2023 budget that President Bola Tinubu saw does not include a fuel subsidy allocation, as he already proclaimed it would no longer exist. However, if better options are presented to Nigerians, animosity toward the elimination of subsidies can be averted.
Transport Cost
The harsh reality of subsidies is that everything in Nigeria costs more as gasoline prices rise at the pump, especially transportation.
In Nigeria, only a small amount of fuel is used in the production of most goods, making the relationship between fuel and production weak. However, the relationship between fuel and transportation is very strong because fuel is used for distribution, raising the overall cost of goods produced.
In most major cities public transit is frequently insufficient and unable to handle the demand from sizable populations. As a result, more individuals choose private transportation, driving up demand.
The effectiveness of subsidy elimination on transportation will be disastrous unless the nation makes investments in transportation infrastructure. To lessen the impact of subsidy loss on transportation, it’s crucial to maintain good roads, a reliable train network, and public transportation.
Infrastructure and Incentives
Mobility is susceptible to the effects of transportation costs, while fuel subsidies and their elimination have a strong impact on transportation costs. The cost of transportation is not solely based on one factor, though.
The cost of transportation directly depends on the effectiveness and capacity of the various forms of transportation as well as the terminals. Transport costs, mobility delays, and negative economic effects are all caused by inadequate infrastructure.
Transport expenses often decrease as transportation systems get more advanced because they become more reliable and able to manage larger volumes of traffic. Low fuel usage is a result of efficient transportation systems, which are made better by eliminating fuel subsidies. Therefore, cutting off fuel subsidies would be a better idea if the government is already establishing an efficient transportation system.
To mitigate the effects of rising fuel prices, the current administration may decide to deploy the Goodluck Jonathan-styled buses for transporters from 2012. The country had paused subsidy at the time so the former president provided 1,600 mass transit buses after allocating N10 billion for a revolving loan for transportation infrastructure.
The government initially only intended to give cash transfers to low-income households. However, the lack of a government registry to precisely identify eligible homes means that this proposal will be ineffective. By investing in public transportation and fixing the existing road network, the government will be able to cater to low-income earners, civil servants, transporters, and students while also saving from fuel subsidy removal.
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