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The Necessity of Fuel Subsidy Removal in Nigeria: A Path to Economic Growth and Sustainability -By Francis Jeremiah Sharon

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The recent decision by President Bola Ahmed Tinubu to remove fuel subsidy from 1st June has ignited passionate debates and discussions throughout the nation. While the immediate consequence of this move has been an increase in fuel prices, it is crucial to delve into the long-term implications for the country’s development. Amidst the cacophony of dissenting voices, it is essential for the President to maintain focus and prioritize the economic benefits of fuel subsidy removal. In this article, I will explore the reasons why the removal of fuel subsidy in Nigeria is a necessary step towards achieving economic growth and sustainability.

1. Economic Burden of Fuel Subsidy:

Fuel subsidy has indeed imposed a significant burden on Nigeria’s economy, particularly during the tenure of former President Buhari. The escalating costs associated with fuel subsidy have strained government resources and hindered the country’s development efforts. The figures regarding fuel subsidy expenditure during this period are staggering.

In 2015, the Nigerian government spent a considerable sum of N4.4 trillion on fuel subsidy, which increased to N5.8 trillion in 2016. The costs continued to rise, reaching N10.4 trillion in 2017, N11.2 trillion in 2018, N12.4 trillion in 2019, and N11.4 trillion in 2020. These amounts represent a massive drain on the government’s financial reserves, limiting its capacity to invest in crucial sectors that directly impact the lives of its citizens.

Redirecting these substantial funds towards infrastructure development, education, healthcare, and social welfare programs would yield far-reaching benefits for the Nigerian population. By eliminating fuel subsidy, the government can allocate resources more efficiently, addressing the pressing developmental needs of the country and fostering economic growth.

2. Fiscal Sustainability:

Removing fuel subsidy is a crucial step towards achieving fiscal sustainability in Nigeria. The subsidy program has had a significant fiscal impact on the country’s economy, leading to budget deficits and hindering long-term development.

In 2019, Nigeria’s budget deficit was at 3.8% of GDP, largely attributed to the substantial expenditure on fuel subsidy. This deficit indicates that the government was spending more than it was earning, resulting in a reliance on borrowing to bridge the gap. As a consequence, the country’s debt levels increased, and a significant portion of the government’s revenue went towards servicing these debts through interest payments.

By removing fuel subsidy, the government can address these fiscal challenges. Subsidies are a burden on the national budget, diverting funds away from essential sectors such as education, healthcare, infrastructure, and social welfare programs. The removal of subsidies would free up resources that can be channeled into these priority areas, promoting economic growth and improving the overall well-being of the population.

Moreover, fuel subsidy removal can reduce Nigeria’s vulnerability to fluctuations in global oil prices. As a major oil exporter, the country’s revenue is heavily reliant on oil exports. However, global oil prices are volatile, and their fluctuations can significantly impact government revenue. By eliminating fuel subsidies, the government can diversify its revenue sources and reduce its exposure to oil price volatility, thereby fostering greater fiscal stability.

3. Stimulating Investment and Entrepreneurship:

The removal of fuel subsidy sends a positive signal to both local and foreign investors, signaling a commitment to economic reforms and responsible fiscal management. Historical evidence supports this notion by showcasing the impact of subsidy removal on investor confidence and economic performance.

One notable example is the partial removal of fuel subsidy in 2012 under the administration of President Goodluck Jonathan. Prior to the subsidy removal, Nigeria was grappling with rising subsidy costs and fuel shortages, which hindered economic activities and investor confidence. The government took the bold step of reducing the subsidy and allowing market forces to determine fuel prices. This move signaled a commitment to addressing fiscal challenges and creating an enabling environment for investment.

Following the partial subsidy removal, investor confidence improved, and Nigeria experienced an increase in foreign direct investment (FDI) inflows. According to the Nigerian Investment Promotion Commission (NIPC), FDI inflows reached $7.1 billion in 2012, representing a significant increase compared to previous years. This surge in investor confidence was driven by the belief that the government was committed to implementing economic reforms, reducing fiscal vulnerabilities, and promoting a more business-friendly environment.

Another historical example is the removal of fuel subsidy in Ghana in 2015. Ghana, like Nigeria, faced significant fiscal challenges due to the high cost of fuel subsidies. The government decided to remove the subsidy to address budget deficits and improve fiscal sustainability. This move was positively received by investors, as it demonstrated a commitment to fiscal discipline and economic reforms.

Following the subsidy removal in Ghana, the country’s macroeconomic indicators improved. The budget deficit narrowed, inflation rates stabilized, and investor confidence grew. The World Bank, in its report on Ghana’s economic outlook, highlighted the removal of fuel subsidies as a positive step towards sustainable economic growth and investor confidence.

These historical examples demonstrate that the removal of fuel subsidy can have a positive impact on investor sentiment. With a more transparent and market-driven fuel pricing mechanism, businesses can make better-informed decisions and plan for the future. This, in turn, fosters entrepreneurship, stimulates investment, and attracts capital inflows into the country, creating new job opportunities and driving economic growth.

By removing fuel subsidies, Nigeria can enhance its fiscal sustainability, reduce reliance on oil revenues, and create a more stable and investor-friendly economic environment. It sends a strong message that the government is serious about implementing necessary reforms, addressing fiscal challenges, and promoting responsible fiscal management. This, in turn, can attract both domestic and foreign investors, stimulate economic growth, and contribute to the overall development of the country.

4. Encouraging Local Refining and Industrialization:

The removal of fuel subsidy in Nigeria is a significant step towards promoting self-sufficiency in petroleum products and reducing the country’s dependence on imports. The development of local refining capacity, including the Dangote Refinery and other upcoming refineries, holds great promise for Nigeria’s economy.

The Dangote Refinery, with its massive refining capacity of 650,000 barrels per day, is set to become the largest single-train refinery in the world. This capacity alone is sufficient to meet Nigeria’s domestic demand for refined petroleum products and even generate a surplus for export. By producing these products domestically, Nigeria can save billions of dollars spent on imports, which will help ease the strain on foreign exchange reserves and improve trade balances.

In addition to the Dangote Refinery, other refineries are also in the pipeline, such as the Oando Refinery, NNPC Modular Refineries, Waltersmith Petroman Energy Refinery, and Niger Delta Petroleum Resources Refinery. These refineries, with their combined capacities, will further enhance Nigeria’s refining capabilities and reduce import dependency.

The establishment of these refineries will not only ensure a stable and affordable supply of petroleum products for domestic consumption but also stimulate economic growth. The savings from reduced imports can be redirected towards critical sectors like education, healthcare, infrastructure, and social welfare programs. Moreover, the growth of the downstream sector will create employment opportunities and foster the development of ancillary industries, contributing to job creation and economic diversification.

Furthermore, a robust refining sector will attract both local and foreign investments, as it signals Nigeria’s commitment to economic reforms and responsible fiscal management. Investors will have more confidence in the stability of the domestic market and the potential for long-term growth. This influx of investments can further propel industrialization, technological advancement, and overall economic development in the country.

Amidst the clamor of dissenting voices, it is imperative for President Bola Ahmed Tinubu and the Nigerian government to remain focused on the long-term economic benefits of fuel subsidy removal. By redirecting resources to critical sectors, ensuring fiscal sustainability, and promoting self-sufficiency in petroleum products, Nigeria can chart a path towards economic growth, development, and a more prosperous future for its citizens. While the current debates may generate noise, it is crucial to look beyond the immediate challenges and embrace the transformative potential of this decision.

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