Abayomi Akinbo: Pathways to Mitigating the Impact of Petrol Subsidy Removal in Nigeria

Nigeria’s new President, Bola Ahmed Tinubu, surprised Nigerians by announcing the removal of subsidies with an off-the-cuff comment in his inaugural speech. That seemingly marked the end of an 11-year-old debate that came to a head with theOccupyNigeria protest. While subsidy has been extensively discussed and debated, the bone of contention has largely remained on when and how subsidy should be removed. Citizens have been clear about the things that make an ideal time for subsidy removal – specific actions and structures driven by a strong political will, cost-cutting measures in government spending, and clear commitment and transparency in reinvesting subsidy savings. 

The president’s inaugural comment reverberated immediately across the country, increasing the price of fuel by 250%. The impact was swift – with service and food prices rising. The erratic power supply that affects small and medium-scale businesses, products and services means their reliance on petrol-powered energy sources will increase the cost of doing business, which will be passed on to consumers. 

Subsidy removal should imply an increase in the minimum wage to cushion the effect of its economic impact. But Nigeria’s over-bloated recurrent expenditure and debts incurred to pay salaries at the federal and state levels are equally of concern. A decisive action to cut the cost of governance is necessary if a minimum wage increase were implemented as part of a multi-prong economic and fiscal policy. Undoubtedly, this subsidy removal will be increasingly difficult for Nigerians, even though they seem to be working around it.

Existing Issues

Rising Cost of Subsidy and Unsustainable Debt

The cost of subsidising petrol has escalated significantly over the years, placing a substantial burden on public finances. This is primarily due to the difference between the regulated price at which petrol is sold to consumers and the higher market price at which importers procure it. The subsidy burden can also fluctuate as global oil prices fluctuate, further straining government resources and contributing to Nigeria’s growing public debt. The government resorted to borrowing to sustain the subsidy program, further exacerbating Nigeria’s debt levels. This limits fiscal flexibility and poses risks to macroeconomic stability and long-term economic growth.

Revenue Constraints

Nigeria heavily relies on oil revenues as a significant source of government income. The reduction in oil prices in recent years, coupled with production disruptions and volatility in global oil markets, has negatively impacted the country’s revenue generation capacity. This has further constrained the government’s ability to sustain the petrol subsidy, leading to significant fiscal pressures.

Fiscal Imbalance 

The continued subsidisation of petrol contributes to a fiscal imbalance in Nigeria. Nigeria is experiencing a funding squeeze, with the government consistently spending more than it collects in revenue, leading to budget deficits and increasing public debt levels.  The funds allocated to petrol subsidies could otherwise be channelled towards critical sectors such as healthcare, education, infrastructure, and social welfare programs, ensuring fiscal openness. 

Corruption and Inefficiencies

Inefficiencies, corruption, and leakages have plagued the petrol subsidy regime in Nigeria. There have been reports of fraud, diversion of subsidised fuel for illegal purposes, and mismanagement of funds intended for subsidy payments. These challenges undermine the intended benefits of the subsidy, erode public trust, and exacerbate fiscal strains on the government. More than ever, the new administration needs to bring fiscal openness and decisive governance to the fore. 

The Pronouncement 

The recent announcement by the new president, in his inaugural speech, to remove petrol subsidies has stirred a mix of optimism and concern among citizens. The decision, driven to address subsidy inefficiencies and redirect resources towards vital sectors, reflects a step towards a more sustainable economic future. However, we must also acknowledge the potential adverse effects on macroeconomic indicators and the need for well-planned strategies to minimise the impact on the citizenry during this transition.

The decision of the new administration to eliminate petrol subsidies carries substantial economic implications, especially considering the prevailing macroeconomic challenges. However, it is essential to recognise that subsidy removal cannot exist as an isolated policy. It relies on successfully implementing complementary monetary and fiscal policies to mitigate its impact. Safeguarding the citizenry’s well-being is at the heart of effective policy implementation, emphasising the significance of implementing appropriate monetary and fiscal measures to minimise the consequences of petrol subsidy removal.

Proposed Actions

Unemployment Reduction:

a. Targeted job creation initiatives: The government can continue implementing public works programs, such as infrastructure development projects, that create employment opportunities across various sectors. Additionally, supporting small and medium-sized enterprises (SMEs) through access to credit, business development services, and capacity-building programs can stimulate job creation.

b. Enabling Tech Ecosystem: The government can foster a favourable policy environment, promote digital skills development, and facilitate access to funding and resources for tech startups and entrepreneurs. Through this, the government can harness the potential of the tech sector to generate employment opportunities, drive revenue generation, drive economic growth, and enhance the country’s competitiveness in the digital economy.

c. Entrepreneurship promotion: Encouraging entrepreneurship through incentives, simplified registration processes, and business development support can foster innovation and job creation, particularly in labour-intensive sectors like agriculture, manufacturing, and services.

d. Vocational training and skills development: Expanding vocational training programs, apprenticeships, and skill-building initiatives can enhance the employability of the workforce, aligning their skills with market demands and reducing unemployment rates.

Security Enhancement:

a. Allocating adequate resources and ensuring responsible utilisation: Nigeria has spent trillions of naira on security over the past decade. However, the past administration has made more allocation to security and defence. The government must ensure that security spending impacts citizens’ safety by taking decisive steps to safeguard lives and property, especially in the most affected regions. The government must allocate sufficient financial and logistical resources to improve the security apparatus, including law enforcement agencies, intelligence gathering, and counter-terrorism efforts.

b. Enhanced institutional collaboration: Strengthening coordination and information sharing among security agencies at federal, state, and local levels can improve the effectiveness of security operations and mitigate security challenges. Different security agencies can work together seamlessly, pool resources, intelligence, and expertise to address security challenges more effectively.

Strengthening the Health System:

The COVID-19 pandemic has shed light on the vulnerabilities of healthcare systems worldwide, including in Nigeria and Africa. While we have been relatively fortunate in terms of mortality rates, the crisis has exposed the fragility and insufficiency of our healthcare infrastructure, resources, and preparedness to combat a widespread and severe health emergency effectively. Strengthening primary healthcare centers is crucial in our battle against pandemics as they enable early detection and screening of cases, ensuring swift identification of infected individuals. By enhancing the accessibility and quality of primary healthcare services, we can alleviate the burden on larger hospitals. This saves both the government and individuals money and allows people to allocate more resources to other vital needs, consequently bolstering the overall economy. Moreover, prioritizing healthcare governance reforms, improving procurement systems, and implementing robust quality assurance mechanisms will enhance the efficiency and effectiveness of healthcare delivery, ultimately leading to improved health outcomes for all.

Foreign Exchange Rate Management:

a. Narrowing the exchange rate gap: Towards achieving a unified exchange rate, the CBN can implement measures to reduce the disparity between the official and parallel market exchange rates, such as improving foreign exchange market liquidity, strengthening market interventions, and enhancing foreign exchange reserve management.

b. Diversification of export revenue: Encouraging diversification of revenue sources from a diversified economy beyond oil by promoting non-oil sectors, such as agriculture, tech, manufacturing, solid minerals, and services, can reduce dependence on oil revenue and stabilise foreign exchange inflows.

c. Strengthening monetary policy interventions: The CBN can utilise monetary policy tools, including open market operations and foreign exchange market interventions, to stabilise and mitigate exchange rate volatility.

Fiscal Policies and Revenue Generation:

a. Tax administration reforms: Implementing structural reforms to improve tax administration, broaden the tax base from its current abysmal numbers and reduce tax evasion can enhance revenue generation capacity. More importantly, ensuring tax transparency and a tax-for-service-delivery approach fosters tax revenue generation.  

b. Rationalising government expenditure: With a bloated recurrent expenditure, the Nigerian government must prioritise critical sectors, reduce wasteful spending, embark on flushing out ghost workers, encourage performance-based budgeting and enhance budgetary discipline to ensure efficient utilisation of resources and redirect funds towards social and economic development initiatives that matter. 

c. Exploring alternative revenue sources: The government can focus on developing non-oil sectors, such as tech, agriculture, manufacturing, tourism, and technology, and foster public-private partnerships to diversify revenue streams and reduce dependence on oil revenue.

Social Safety Nets:

Streamlined and Transparent Social Safety Nets: While implementing targeted social safety net programs like conditional cash transfers or subsidized food distribution, it is crucial to prioritize transparency and adherence to policy objectives. These programs can support vulnerable populations, ensuring they are not disproportionately affected by subsidy removal. However, it is essential to recognize that these programs should not operate independently and must strictly adhere to the conditions set to achieve the desired outcomes. The much-discussed World Bank loan of $800 million raises concerns about the need for more clarity and coherence in the government’s plan for utilizing the funds. Establishing transparent criteria and guidelines for identifying beneficiaries that meet global implementation standards is essential.

Fiscal Openness and Participatory Governance

a. Implement a sustainable, transparent and participatory budgeting process across federal and subnational that involves input from citizens and civil society organisations can help ensure that budget allocations are aligned with the priorities and needs of the population, fostering accountability and trust and ensuring budget credibility where the government’s annual budget accurately reflects its planned revenue, spending, and fiscal policies.

b. Enhance financial accountability mechanisms by implementing robust systems for auditing and monitoring government spending. Build on existing efforts on the Open Treasury portal to increase financial transparency and accountability around public expenditure. This helps identify and address any mismanagement or corruption, reinforcing public trust in the government’s handling of public finances.

c. Increase political will on Open Government Partnership: Nigeria’s membership of the Open Government Partnership (OGP) presents an opportunity for collaborative governance for service delivery. OGP emphasises citizen participation in decision-making processes. Nigeria can continue to engage citizens, civil society organisations, and other stakeholders in policy discussions related to subsidy removal. This inclusive approach ensures that the citizens’ concerns and interests are considered. Through dialogue and collaboration, innovative solutions can be identified to mitigate the economic impact on vulnerable populations and address the potential social consequences of subsidy removal.

Public Expenditure Management Reforms

Implementing reforms to improve public expenditure management is crucial to mitigating the economic impact of subsidy removal in Nigeria. A critical area for reform is the strengthening of procurement processes. The government can minimise the risk of waste, fraud, and corruption by ensuring that procurement processes are open, competitive, and transparent. This can be achieved by establishing clear guidelines and regulations for procurement, conducting thorough and fair bidding processes, and promoting the use of technology for greater transparency.

Agriculture

The government can continue to improve agricultural sector efficiency, which involves implementing measures to increase productivity and performance for sufficiency and competitiveness. This can be achieved by promoting modern farming and cattle-rearing techniques, sustainable practices considering the green economy and climate change issues and technology adoption to optimise yields and reduce waste. Investing more in irrigation infrastructure allows farmers to grow crops year-round, ensuring a stable food supply and mitigating inflation. Nigeria cannot continue to close its borders in hopes that grain production will increase. Providing farmers with accessible credit supports their operations and boosts productivity, reducing the risk of food price inflation. Supporting research and development leads to innovative solutions tailored to local conditions, enhancing efficiency and productivity. These efforts result in increased food production, stable prices, job creation, and economic growth, reducing reliance on imports and contributing to overall stability. Enhancing agricultural sector efficiency is vital for Nigeria’s economic development and food security.

The effective implementation of the strategies outlined above holds great significance in mitigating the consequences of removing petrol subsidies in Nigeria. The government must prioritize critical areas such as unemployment reduction, security enhancement, strengthening of the health system, foreign exchange rate management, fiscal policies, fiscal openness, and social safety nets. Nigeria can strive towards sustainable economic growth and development by adopting a coordinated approach, diligently executing policies, and maintaining ongoing monitoring and evaluation. By doing so, the government can provide economic and fiscal buffers that safeguard the well-being of its citizens and steer the nation towards a prosperous future.

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Abayomi Akinbo is a professional with extensive expertise in fiscal openness, public
financial management, and participatory governance. Over the course of his decade-
long career in the development sector, he has made notable contributions to
enhancing public dialogues and improving public service delivery by prioritizing
citizen engagement in policy-making processes. Abayomi has played a crucial role in
providing technical support to States in Nigeria, assisting them in implementing open
government principles and sustainable participatory budgeting practices under the
World Bank-assisted Federal Government of Nigeria’s States Fiscal Transparency
Accountability and Sustainability (SFTAS) Program for Results.
Abayomi holds a Master of Public Administration from the University of Portsmouth,
U.K., and has acquired additional qualifications such as a certificate in Evidence in
Public Policy from the Blavatnik School of Government at Oxford University, U.K., a
Public Management certificate from Howard University in Washington, D.C and
Result-Based Impact Reporting from West Africa Civil Society Institute, Ghana. His
dedication and contributions to governance in Nigeria have been recognized through
prestigious awards, including the US Consulate Walter Carrington Youth Fellowship
Award in 2016 and the Mandela Washington Fellowship Award in 2017.

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