- Removal of the fuel subsidy in Nigeria is long overdue, but replacing it with a transport grant is not the best approach
Following unrelenting pressure by the International Monetary Fund (IMF) and World Bank, the Nigerian government intends to eliminate its fuel subsidy in July 2022.
Nigeria spent about N10 trillion (currently US$24.5 billion) on petroleum subsidies between 2006 and 2018. About $2.5 billion was spent on fuel subsidies in 2020. It is expected that the subsidy will have cost $3 billion in 2021.
In lieu of the subsidy, government says, 40 million poor Nigerians will receive a “transport grant” of N5,000 ($12) per month. This will amount to about N2.4 trillion ($5.8 billion) per year.
These figures imply that the expected savings from ending the subsidy can only cover about half of the cost of the proposed transport grant. In an era where the government has been grappling with huge budget deficits and spiralling debt, it’s unclear how the other half will be paid for.
If you value The Conversation, help us start 2022 strong.
In the public space, there are views that the removal of the fuel subsidy in Nigeria is long overdue, and that vested interests and political expediency have prevented this from happening sooner.
The clamour for subsidy removal stems from the argument that it is inequitable and favours affluent Nigerians who use a disproportionate amount of fuel.
It is often argued that the fuel subsidy diverts almost $3 billion per year that could have been invested in areas such as health, education and infrastructure that enhance the productive capacities of the poor.
Apart from equity issues, much has been written about how the fuel subsidy has bred corruption and added to the ever-increasing budget deficits in Nigeria.
But the government’s plan to replace the subsidy with a transport grant is not the best approach for using fuel subsidy savings. My calculations of the cost of the grant suggest that it is unsustainable.
Devil in the details
Removing the subsidy will surely increase the price of petrol in Nigeria, which will cause transport fares to rise.
The extent of these increases is uncertain, which raises the question of why the government chose N5,000 as the optimum amount that would supposedly cushion the effects of price increases.
Then there’s the question of who will get the grant. According to the World Bank, 47.3% of Nigerians, or 98 million people, live in multidimensional poverty. If the transport grant is only for 40 million, then it will reach fewer than half of poor Nigerians.
It is unclear what criteria will be used to determine which Nigerians will receive the grant. There is therefore the risk that those who need the grant the most may not receive it.
Means-testing as a tool for determining eligibility for safety nets in Nigeria is very difficult. In the absence of a means-testing mechanism, the National Social Safety-Net Coordinating Office in 2016 began to compile a national social register of poor Nigerians. About 30 million have so far been captured in the register.
Paying a grant in an environment where information on income, assets, bank accounts and identity cards is sparse could create opportunities for corruption, cronyism and nepotism.
The government has announced that the grant will last for one year, in the first instance. This may be interpreted as a political stunt with government hoping that Nigerians will forget the subsidy removal later.
The first year of the grant will end at the same time as the President Muhammadu Buhari administration does in 2023. So it may be that this administration is trying to shield itself from the backlash from fuel subsidy removal, while passing the buck to the next administration.
Poor Nigerians will be hurt if the price of petrol increases significantly, without making the transport grant permanent. A transport grant may have the effect of inducing transporters to raise fares, at a rate that might wipe out the gains from the grant.
In other words, many Nigerians will face a double whammy of increases in fuel price and a rise in transport fares.
What to do
Based on the fact that the transport grant is unsustainable, and also the difficulty of determining which Nigerians should be eligible for the grant, a better strategy for cushioning the effects of fuel subsidy removal is massive investment in public transportation.
The price of a 56-passenger 2019 luxury bus is about $400,000. So the $3 billion in 2021 fuel subsidies would have purchased 7,500 buses, or about 200 buses for each of the country’s 36 states. This strategy would have more of an impact and be more inclusive than a transport grant that most Nigerians will not receive.
Each state should be encouraged to establish an intra-state transportation agency. The federal government should have a similar agency for inter-state travel. Part of the savings from subsidy removal should be allocated to the state and federal transportation agencies.
They could purchase buses with the fund and cover administrative costs of providing subsidised transport to workers (both formal and informal), farmers, students and other indigent Nigerians.
Using the fuel subsidy savings to support a network of subsidised public transportation in urban and rural areas would boost Nigeria’s productive capacity in various ways.
It would reduce food inflation, as farmers would be able to transport their products to the market more easily and at a lower cost. This would encourage them to produce more and drive down food prices.
Nigeria should learn from the Indian experience, where public transportation subsidies have boosted food supply and lowered food prices.
Nigeria should prioritise investments that raise the economy’s productive capacities, rather than focusing on increasing consumption. Recipients of the transport grant may spend the money on non-durable consumer goods, which could drive inflation, already about 16%. These goods are most likely to be imported, which would strain the country’s scarce foreign exchange.
The provision of subsidised public transport would be good for workers, as it would enable them to spend more on things that increase their productive capacities and contribute to Nigeria’s gross domestic product (GDP).
Nigerian students at all levels of education would benefit from the investment in public transport. Most of them do not receive direct financial support from the government, but subsidising transport would indirectly subsidise their education.
The government would be pacifying students and workers, who are usually the most vociferous in opposing subsidy removal. Previous administrations in Nigeria have jettisoned plans to remove the fuel subsidy, following massive and violent protests against those attempts.
The above article, written by Stephen Onyeiwu, Andrew Wells Robertson Professor of Economics, Allegheny College, was published in The Conversation