Description
There has been vociferous undaunted in trying to convince Nigerians to accept the subsidy removal is the claim that the economy may crash if the subsidy is not removed. Proponents of the subsidy posit that the subsidy has to go because we need the money to rebuild the economy. Opponents of the policy argued that there is nothing like subsidy ever existed in Nigeria, and that hat was surreptitiously being promoted by government as removal of subsidy was increase of petrol price under a deceptive guise. The paper, therefore, examines the implications of the subsidy removal on the economy in general.
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1.0 INTRODUCTION
Oil is a major source of energy in Nigeria and the world at large. Oil being the main stay of
the Nigerian economy plays a vital role in shaping the economic and political destiny of the
country. Although Nigeria’s oil industry was founded at the beginning of the century, it was
not until the end of the Nigeria civil war (1967 – 1970) that the oil industry began to play a
prominent role in the economic life of the country.
Nigeria can be categorized as a country that is primarily rural, which depends on primary
product exports (especially oil products). Since the attainment of independence in 1960, it has
experienced ethnic, regional and religious tensions, magnified by the significant disparities in
economic, education and environmental development in the south and the north.
However, a subsidy (also known as subvention) is a form of financial assistant paid to a
business or economic sector. Most subsidies are made by the government to producers or
distributors in an industry to prevent the decline of that industry (e.g., as a result of
continuous unprofitable operations) or an increase in the prices of its products or simply to
encourage it to hire labour (as in the case of a wage subsidy).
1.1 BRIEF HISTORY OF OIL AND GAS IN NIGERIA
Oil and gas operation commenced in Nigeria effectively in 1956, with the first commercial
firm in that year by the then Shell D’Arcy. Before November 1938, almost the entire country
was covered by a concession granted to the company to explore for petroleum resources. This
dominant role of Shell in Nigeria oil industry continued for many years, until Nigeria’s
membership of the Organization of Petroleum Exporting Countries (OPEC) in 1971, after
which the country began to take a firmer control of its oil and gas resources, in line with the
practice of the other members of OPEC. This period witnessed the emergence of National Oil
Companies (NOCs) across OPEC member countries, with the sole objective of monitoring
the stake of the oil-producing countries in the exploitation of the resources. Whereas in some
OPEC member countries the NOCs took direct control of production operation, in Nigeria,
the Multinational Oil Companies (MNOCs) where all allowed to continue with such
operations under Joint Operating Agreements (JOA) which clearly specified the respective
stakes of the companies and the Government of Nigeria in the Ventures. This period also
witness the arrival on the scene of other MNOCs such as Gulf Oil and Texaco (now
ChevronTexaco), Elf Petroleum (now Total), Mobil (now ExxonMobil), and Agip, in
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addition to Shell, which was already playing a dominant role in the industry. These other
companies were also operating under JOAs with NNPC (Nigerian National Petroleum
Corporation), with varying percentages of stakes in their perspective acreages (land area). To
date, the above companies constitute the major players in Nigeria’s oil industry, with Shell
accounting for just little less than 50percent of Nigeria’s total daily production, which
currently stands about 2.4 million barrels of oil per day. JOAs are also still dominant in the
oil industry in Nigeria, accounting for over 90percent of total oil and gas production in
Nigeria today.
The Nigerian oil sector can be categorized into three main sub-sectors, namely, upstream,
downstream and gas. The most problematic over the years has been the downstream sector,
which is the distribution arm and connection with final consumers of refined petroleum
products in the domestic economy. The unceasing crisis in supply of products culminated in
the decision by the Government in 2003 to deregulate (privatize) the downstream sub-sector.
However, the manner of its implementation has been controversial because it ignores the
economic realities in Nigeria. Oil production by the joint venture (JV) companies account for
95percent of Nigeria’s crude oil production. Shell, which operates the largest joint venture in
Nigeria, with 55percent Government interest (through the Nigerian National Petroleum
Corporation, NNPC), produces about 50percent of Nigeria’s crude oil. ExxonMobil,
ChevronTexaco, ENI/Agip and Total/Elf operate the other JV’s, which the NNPC has
60percent stake. The over-dependence on oil has created vulnerability to the vagaries
(unexpected change) of the international market.
Government however subsidized the oil and gas industry so as to reduce the price of fuel
payable by the masses. The removal, reduction or restructuring of such subsidies is helpful
for the environment and the economy at the same time.
1.2 HISTORY OF FUEL SUBSIDY IN NIGERIA
The history of issues on fuel subsidy in Nigeria dates back to April 1982 when Ibrahim
Babangida’s government raised the price of a litre of fuel from 15.3kobo to 20kobo. He did it
again on March 31, 1986, from 20k to 39.5k; on April 10, 1988, from 39.5k to 42k. On
January 1, 1989, he increased the price from 42k to 60k (although the regime said it was for
private vehicles only, but the price remained 42k for commercial vehicles). On December 19,
1989, it moved to a uniform price of 60k. On March 6, 1991, the price of a litre of fuel was
increased from 60k to 70k and that was the price when he stepped aside in August 1993.
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Chief Ernest Shonekan increased the price of a litre of fuel from 70k to N5 on November 8,
1993 but a hectic mass protest, saw Abacha take over power. The incoming Abacha regime
reduced the increment to N3.25 on November 22, 1993. On October 2
nd
1994, the Abacha
junta increased the price of fuel to N15, from N3.25 but after massive street protests, the
regime reduced the increment to N11 on October 4, 1994. That was the price till Abacha
passed on, and the Abdulsalami Abubakar caretaker regime raised the price from N11 to N25
on December 20, 1998 and after days of sustained protests, it was forced to reduce the
increment to N20 on January 6, 1999. The Obasanjo’s presidency adopted fuel subsidy as the
bedrock of its economic policy, for no sooner than it was sworn in that it effected an
increment to N30 on June 1, 2000 but protests and mass rejection forced it to reduce the
increment to N25 on June 8, 2000 and further down to N22 on June 13, 2000. The regime
was again to increase the price to N26 on January 1, 2002 and again to N40 on June 23, 2003.
He was to raise it up to N70 by the time he left in May 2009 but the incoming Yar’Adua
regime reduced it to N65, after general protest against the new price regime. Although the
Yar’Adua government made efforts to increase the price of petroleum products it could not
scale through following increased mass disapproval for such act.
Presently, the Goodluck Jonathan administration has removed fuel subsidy which the
administration claims will save it N1.3trillion to N1.5trillion annually which it will channel
into infrastructural development (Lawson, 2012).
The purpose of this study is to examine the impact of such removal on the economy as a
whole.
2.0 LITERATURE REVIEW
2.1 WHAT IS FUEL SUBSIDY?
A subsidy is an assistance paid to a business or economic sector mainly by the
government to prevent the decline of that industry (Todaro and Smith, 2009). On the other
hand, the Oxford Advanced Learners Dictionary (2001) defined a subsidy as money that is
paid by a government or an organization to reduce the cost of services or of producing goods
so that their prices can be kept low. In addition, Bakare (2012) points out that to subsidize is
to sell a product below the cost of production. Within the Nigerian context, fuel subsidy
means to sell petrol below the cost of importation.
Subsidy may also be used to refer to government actions which limit competition or raise
the prices at which producers could sell their products, for example, by means of tariff
protection. Although economics generally holds that subsidies may distort the market and
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produce inefficiencies, there are a number of recognized cases where subsidies may be the
most efficient solution. Examples of industries or sectors where subsidies are often found
include utilities, gasoline in the United States, welfare, farm subsidies, and (in some
countries) certain aspects of student loans.
In standard supply and demand curve diagrams, a subsidy will shift either the demand curve
up or supply curve down. A subsidy that increases the production will tend to result in a
lower price, while a subsidy that increases demand will tend to result in an increase in price.
Both cases result in a new economic equilibrium. Therefore it is essential to consider
elasticity when estimating the total cost of a planned subsidy: it equals the subsidy per unit
(difference between market price and subsidized price) times the new equilibrium quantity.
One category of goods suffer less from this effect: Public goods are-once-created in ample
(more than enough) supply and the total cost of subsidies remain constant regardless of the
number of consumers; depending on the form of the subsidy, however, the number of
producers on demanding their share of benefits may still rise and drive cost up.
2.1.1 TYPES OF SUBSIDY
There are many different ways to classify subsidies, such as the reason behind them, the
recipients of the subsidy, the source of the funds (government, consumers, general tax
revenues, etc.). In economics, one of the primary ways to classify subsidies is the means of
distributing the subsidy.
In economics, the term subsidy may or may not have a negative connotation: that is, the use
of the term may be prescriptive descriptive. In economics, a subsidy may nonetheless be
characterized as inefficient relative to no subsidies; inefficient relative to other means of
producing the same results; “second-best”, implying an inefficient but feasible solution
(contrasted with an efficient but not feasible ideal), among other possible terminology. In
other cases, a subsidy may be an efficient means of correcting a market failure.
For example, economic analysis may suggest that direct subsidies (cash benefits) would be
more efficient than indirect subsidies (such as trade barriers); this does not necessarily imply
that direct subsidies are bad, but that they may be more efficient or effective than other
mechanisms to achieve the same (or better) results.
Insofar as they are inefficient, however, subsidies would generally be considered by
economists to be bad, as economics is the efficient use of limited resources. Ultimately,
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however, the choice to enact subsidy is a political choice. Note that subsidies are linked to the
concept of economic transfers from one group to another.
Economic has also explicitly identified a number of areas where subsidies are entirely
justified by economics, particularly in the area of provision of public goods.
Labour Subsidies
A labour subsidy is any form of subsidy where the recipients receive subsidies to pay for
labour cost. Examples may include labour subsidies for workers in certain industries, such as
film and/or television industries.
Infrastructure Subsidies
In some cases, subsidy may refer to favouring one type of production or consumption over
another, effectively reducing the competiveness or retarding the development of potential
substitutes. For example, it has been argued that the use of petroleum, and particularly
gasoline, has been subsidized or favoured by U.S. defense policy, reducing the use of
alternative energy sources and delaying their commercial development. However, alternative
energy sources have also been subsidized by the federal and state governments, though only
by a comparatively tiny amount.
In other cases, the government may need to improve the public transport to ensure Pareto
improvement is attained and sustained. This can therefore be done by subsidising those transit
agencies that provide the public services so that the services can be affordable for everyone.
This is the best way of helping different groups of disabled and low income families in the
society.
Trade Protection (import restriction)
Measures use to limit a given good than they would pay without the trade barrier; the
protected industry has effectively received a subsidy. Such measures include import quotas,
import tariffs, import bans, and others.
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Export Subsidies (trade promotion)
Various tax or other measures may be used to promote exports that constitute subsidies to the
industries favoured. In other cases, tax measures may be used to ensure that exports are
treated fairly under the tax system. The determination of what constitutes a subsidy (or the
size of that subsidy) may be complex. In many cases, export subsidies are justified as a means
of compensating for subsidies or protections provided by a foreign state to its own producers.
Procurement Subsidies
Government everywhere are relatively small consumers of various goods and services.
Subsidies may occur in this process by choice of the products produced, the producer, the
nature of the product itself, and by other means, including payment of higher-than-market
price for good purchased.
Consumption Subsidies
Government everywhere provide consumption subsidies in a number of ways: by actually
giving away a good or service, providing use of government assets, property, or services at
lower than the cost of provision, or by providing economic incentives (cash subsidies) to
purchase or use such goods. In most countries, consumption of education, health care, and
infrastructure (such as roads) are heavily subsidized, and in many cases provided free of
charge. However, these are investment rather than subsidies; both increase the economic
value of the state and affect all as opposed to single groups. In other cases, government
literally purchase or produce a good (such as bread, wheat, gasoline, or electricity) at a higher
cost than the sales price to the public (which may require rationing to control the cost).
The provision of true public goods through subsidies is an example of a type of subsidy that
economics may recognize as efficient. In other cases, such subsidies may be reasonable
second-best solutions; for example, while it may be theoretically efficient to charge for all
use of public roads, in practice, the cost of implementing a system to charge for such use may
be unworkable or unjustified.
In other cases, consumption subsidies may be targeted at a specific group of users, such as
large utilities, residential home-owners, and others.
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2.2 GENERAL OVERVIEW OF OIL AND GAS IN NIGERIA
Gas prices affect all Nigerians, both the wealthy and the poor, and the Central Intelligence
Agency's (CIA) World Factbook estimates that as at 2000, 60percent of Nigerians live on less
than a dollar a day. This is a huge number considering that the World Bank estimates that
Nigeria has a population of 135.6 million as at 2003 and the last population census conducted
in 2006 estimates that Nigeria has a population of over 180 million.
“Disruptions in the Nigerian downstream sector have deeper and more immediate domestic
political implications for the country than those that may occur in the upstream sector”
(Khan, 1994).
An Executive in one of the bank, Ms. Comfort Umoh, said, “This goes to show that the
government we have is not people-friendly, rather, it is what will be beneficial to the few
people in government that matters at the end of the day.”
She further said, “It is not fair! Why won’t the government do a survey on issues before
taking a decision? The consumers will definitely suffer the removal of fuel subsidy. This is a
major oversight. In a country like Nigeria, where more than half of the population lives on
less than one dollar per day, it is important to evaluate policies that may raise poverty levels.”
“Moreover, it is critical to evaluate such effects before implementing the policies so that
complementary reforms, where necessary, can be put into place to address the burden on the
poor,” she noted.
Umoh argued that the position of the government’s fiscal policy following subsidy removal
would be important in determining the effects of poverty on the citizens.
A Human Resource expert, Mr. Chidi Nwankwo, stated that the removal of fuel subsidy
would limit the country’s ability to attain the first Millennium Development Goal, which is
reducing the number of people living in poverty by 2015.
He also said this was at odds with global concern for the low level of economic growth and
recently reported declining human development index in the country.
He added that it was also smacked of double standards in the current patterns of state
intervention in free markets.
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He said, “It is obvious that the pressure to remove subsidy is designed by experts with
insufficient understanding of the Nigerian economy or who choose to ignore the inability of
the government to effectively implement anti-poverty programmes planned as a wider
element of a fiscal policy agenda.”
The suspended CBN (Central Bank of Nigeria) governor (Lamido Sanusi) had in Washington
said that subsidy removal will pose a challenge to monetary policy authority due to its
inflationary impact in the short run. He said “though the Ministry of Finance has plans to rein
in government spending, it can be realised in the medium of long term. In practice, fiscal
retrenchment cannot hold in the short term”.
According to him, “the monetary authority has been battling with excess liquidity which is
causing inflation and undue pressure on the exchange rate of the Naira and interest rates”. He
said that, “subsidy removal though desirable, will pose a great challenge to monetary policy
authority because in the short run, the immediate impact of the removal will be on price of
goods and services”. This he said has the potential of pushing up prices of goods and services
in the country. He said in the interest of the economy and the nation, there is the urgent need
for greater collaboration and coordination between fiscal and monetary authorities to deliver
better policies to move the economy forward.
However, following the latest resolve by Federation Accounts Allocation Committee (FAAC)
to stop the subsidy deductions, General Secretary of Petroleum and Natural Gas Senior Staff
Association of Nigeria (PENGASSAN), Mr. Bayo Olowoshile had urged President Goodluck
Jonathan to jettison the resolution.
Describing FAAC decision as unacceptable to the union, he argued that removing the subsidy
without any corresponding increase in purchasing power of individuals could constitute a
negative multiplier effect on all aspects of the economy.
“Government must ensure of the turn around maintenance of all the refineries before
removing the subsidy. We told government at a meeting we held in January that certain
conditions must be met before the removal. Government must fix the four refineries and build
new ones. The corruption associated with supply and distribution of petroleum products in
the downstream sector of the oil industry must be eliminated.”
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CAPTION: INDIVIDUAL/GROUP SUPPORT FOR FUEL SUBSIDY REMOVAL
Former President of Lagos Chamber of Commerce and Industry Otunba Femi Deru in a
position paper said: “The Lagos Chamber of Commerce and Industry, is even more worried
over the horrific cost of sustaining the current system especially through the following
channels: subsidy on imported petroleum products, which runs into hundreds of billions of
Naira through the Petroleum Support Fund (PSF); Colossal sum of tax payers’ money spent
on bridging of petroleum products through the petroleum Equalization Fund (PEF); Profound
integrity and transparency issues associated with management of subsidies, the bridging
funds and refineries.
“This spending pattern poses very grim consequences for the economy. Worse still, most of
the expenditure was not appropriated by the National Assembly. It is a major economic
governance challenge. In the light of the foregoing, the following steps should be taken to
ensure a virile and sustainable downstream oil sector. An exit strategy for all public
enterprises should be immediately worked out to stop them from direct production,
procurement, distribution and marketing of petroleum products; The Petroleum Equalization
Fund should be scrapped; there should be creative incentives for the private sector to set up
refineries both for domestic consumption and for export; private sector agencies should be
engaged to manage and maintain the pipelines; The refineries should be immediately
privatized, with labour issues adequately addressed; The NNPC should disengage completely
from retailing petroleum products. The on-going acquisition of retail outlet by the NNPC is
totally inconsistent with the proposed reform in the sector. Retail outlets, is the least of the
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problems in the sector. The commitment of the public funds to the acquisition of retail outlets
is absolutely unacceptable; there should be a strong regulatory institution with clear
guidelines to guide investors in the sector and protect the interest of the consumers.
The outcome of the adoption of the foregoing is greater private investment in refineries,
procurement, distribution and marketing of petroleum products in the economy. Also, the
economy would save huge sums of money currently being disbursed as subsidy and bridging
funds and be rescued from the massive rent seeking activities and economic parasites in the
downstream sector.”
Dr. Simon Chukwuemeka Okolo former president of NACCIMA (Nigerian Association of
Chambers of Commerce, industry, Mines and Agriculture) said “We support real
deregulation that will increase private sector participation in the downstream oil sector not
government increase of pump price.”
The FAAC during its meeting in March 2014, constituted a sub-committee to among other
things investigate and enlighten members on the performance of the existing subsidy scheme.
Consequently, at its plenary about same period, it finally took a decision, after being briefed
by the ad hoc investigation committee that petroleum subsidy should be scrapped in its
entirety “because we’ve discovered it is more or less a solution worse than the problem it
tends to solve.”
The decision by the states to throw their weight behind the removal of fuel subsidy, gathered
may not be unconnected with the continued decline in monthly statutory mineral revenue
occasioned by oil theft, bunkering and other distortion in production activities. As a result,
allocations from the federation account no longer suffice to execute the infrastructural needs
of the states and local governments which are unable to provide the much-needed jobs and
execute people-oriented contracts with little resources.
Documents showed that monthly net statutory allocations to states had been on a decline in
recent times averaging about N1.5 billion from between about N2 billion in some states.
The onus continued to fall on governments at the regions to deliver on campaign promises to
justify their election into public offices by the people.
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Essentially, the states argue that the huge chunk of money which is continually set aside to
offset fuel subsidy claims were better given directly to the respective states so the resources
could be better administered to solve the plight of the people by prioritising their needs.
3.0 FINDINGS (Personal views)
3.1 SUBSIDY REMOVAL: POSITIVE IMPACT ON THE ECONOMY
The removal would create job opportunities through establishment of refineries. There would
also be free funds for governments to use in other sectors of the economy (such as the
abandoned agricultural sector, education, especially infrastructural development, and also
create economics of scale)
Oil industry analysts have said that removing the subsidy on petroleum product will engender
more activities in the downstream sector of the country’s oil and gas industry, and fast track
the development of the larger economy.
According to findings of this study, investors who have before now turned their back on the
country, as regards the establishment of refineries, would be encouraged to put in place
refineries that are viable, since they would get returns on their investments.
This study also found out that if the investors pumped money into the sector, it would also
lead to competition among marketers (as a result of free market operation) and the price of
the product would begin to come down, because the market would be flooded with the
product as a result of completion.
It will reduce borrowing, no doubt because there will be more money in government’s
account.
This research further found out that if the government removed the subsidy in one swoop, the
price or Premium Motor Spirit (PMS) would escalate (go up) thereby creating a temporary
inflation. Thus, the price would soon normalize however, when the market became saturated
and removing the subsidy, would be good for the country and the economy
In the same vein, if the subsidy was removed, it would boost the nation’s economic activities
and engender competition among marketers. At least, with the removal, the government
would have been able to take care of some other social commitments and enhance the quality
of our roads and provide good security for her citizens.
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3.2 SUBSIDY REMOVAL: NEGATIVE EFFECTS ON THE ECONOMY
Subsidy removal is not good for the country because it will bring a lot hardship to the
generality of Nigerians. The government is always eager to get more money but it will be
better to leave the subsidy as it was.
Removing fuel subsidies will inevitably send prices of petroleum products shooting up, with
petrol costing up to N100 per litre from the normal initial price of N65. So when you are
moving from N65 to N100 (which is about 100percent increase in price). One can imagine
what will happen in the economy and the country of such insecurity and high unemployment
level. It is not going to affect the workers alone; a lot of factories will wind-up. When power
supply is still epileptic despite the heavy bill the private owners of PHCN (Power Holding
Company of Nigeria) impose on the masses without supply of electricity, these are issues.
Small scale business will be wiped out and the remaining industrial concerns will further
relocate out of Nigeria, the cost of transporting food from the hinterland will further escalate
in the face of deplorable roads worsening the prevailing food and job insecurity. The
researcher is of the believe that there is so much corruption around the subsidy matter. If
there is corruption around the subsidy matter, the government should bring those behind the
corruption to book (we all witnessed the Farouk Lawan vs Otedola’s case etc…Nigerians are
still expecting results from the government). There is also fear or lack of guarantees that these
same cartels, when it now becomes an open market will not device a means and take charge
of the market, which we have been seeing come to play lately.
Finally, it will impose a high cost of living on the people. It will cause inflation,
unemployment, closure of factories, discourage entrepreneurs. This can result to another
economy recession which this study kicks against.
4.0 SUMMARY AND CONCLUSION
There is sociological economic implication of the removal of subsidies that must be taken
into consideration. The transportation industry will be adversely affected with higher price of
petrol. They (Transporters) will pass down the burden and cost to the consumers. The price of
food and consumable items will go high and so inflation. The masses too have a
responsibility of recognizing that the fuel subsidies cannot last forever and they must begin to
see that the privilege is not right and subsidy is not a sacred cow that is untouchable.
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The only thing that most Nigerians can point out as a show of the country’s oil wealth is
affordable fuel including petrol and kerosene. The price of kerosene is affordable; now the
government in its all wisdom went ahead and interrupt such a program without first making
another provision to the suffering masses.
Nigerians recognizes that over-spending, over-borrowing and wastefulness must be
restrained, controlled and restricted, but we must also acknowledge that in spite of the
economic theories of sound management; Nigeria has a sizeable majority of her people that
live in poverty and massive depravity. These people must be attended to therefore, the
mopping of liquidity and removal of fuel subsidies must not have preference over human
suffering.
4.1 RECOMMENDATION
In this research work, it is believed that the removal of government subsidies from oil and gas
companies would bring a lot of harm than good to the economy as a whole. However, some
of the reasons behind these include:
Federal government should continue in subsidizing oil and gas sector due to the fact
that despite the cry of the federal government for lack of cash, there are still a lot of
other ways which government can raise funds, for example; reducing the number of
its cabinet which seems less productive in discharging their duties. Every year,
government always disclose excess crude oil income which can also be tailored or
managed in the creation of social amenities.
The removal of government subsidy with the aim of investing in other sector of the
economy, there might be opportunity of misappropriation of funds, which will still
invariably affect the economy adversely.
If the Nigerian government believe in moving forward with effected petroleum
subsidy removals, they need to pay attention to the effects of inflation and
manipulations on consumer prices, currency deprecation, the effects of CBN monitory
polices, introduction of cashless systems High unemployment and insecurity
Finally, the researcher recommends this research work for further study.
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REFERENCE
Bakare, T. (2012). “Much ado about fuel subsidy”, retrieved on April 17, 2014
from the world wide web http://www.vanguardngr.com/2012/01/much-ado-about-
fuel-subsidy/
Ifiok, I. (2005). The economics of privatizing and deregulating the Nigerian downstream
oil sector: Nigeria. 17 Nov. 2005.
Ime, U. (2011). Fuel subsidy removal: Fear of aggravated poverty grips Nigerians
NBF News, retrieved on April 16, 2014 from the world wide web
http://www.nigerianbestforum.com/blog/fuel-subsidy-removal-fear-of-aggravated-
poverty-grips-nigerians/
Khan, S. A. (1994). Nigeria: The political economy of oil. Oxford University press.
Kupolokun, F. ( 2005). Liberalization: The experience of the Nigerian petroleum sector.
Alexanders gas and oil conventions, vol.10, No. 2, 27 Jan. 2005
Lawson, A. (2012), “Fuel subsidy removal: The challenge before house
Committee on petroleum downstream”, retrieved from
http://www.themaceonline.com/house-of-reps-news/241-fuel-subsidy-removal-the-
challenge-before-house-committee-on-petroleum-downstream
Niyi, A. (2014). “States support total removal of fuel subsidy at FAAC meeting”. Retrieved
on April 26, 2014 from the world wide web
http://www.informationng.com/2014/04/states-support-total-removal-of-fuel-subsidy-
at-faac-meeting.html
Oxford advanced learners dictionary (2001), 6
th
edition, Oxford University Press, Oxford:
Newyork.
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Schikpe, A. (2001). Why do government divest: The macroeconomics of privatization:
Berlin: New York: Springer.
Todaro, M.P. and Smith, S.C. (2009). “Economic development”, 10
th
edition, Addison
Wesley: p. 839, ISBN 978-0-321-48573-1. Retrieved from
http://en.wikipedia.org/wiki/subsidy
www.worldbank.org: Nigeria. 17 Nov. 2005.
doc_290319297.docx
There has been vociferous undaunted in trying to convince Nigerians to accept the subsidy removal is the claim that the economy may crash if the subsidy is not removed. Proponents of the subsidy posit that the subsidy has to go because we need the money to rebuild the economy. Opponents of the policy argued that there is nothing like subsidy ever existed in Nigeria, and that hat was surreptitiously being promoted by government as removal of subsidy was increase of petrol price under a deceptive guise. The paper, therefore, examines the implications of the subsidy removal on the economy in general.
1
1.0 INTRODUCTION
Oil is a major source of energy in Nigeria and the world at large. Oil being the main stay of
the Nigerian economy plays a vital role in shaping the economic and political destiny of the
country. Although Nigeria’s oil industry was founded at the beginning of the century, it was
not until the end of the Nigeria civil war (1967 – 1970) that the oil industry began to play a
prominent role in the economic life of the country.
Nigeria can be categorized as a country that is primarily rural, which depends on primary
product exports (especially oil products). Since the attainment of independence in 1960, it has
experienced ethnic, regional and religious tensions, magnified by the significant disparities in
economic, education and environmental development in the south and the north.
However, a subsidy (also known as subvention) is a form of financial assistant paid to a
business or economic sector. Most subsidies are made by the government to producers or
distributors in an industry to prevent the decline of that industry (e.g., as a result of
continuous unprofitable operations) or an increase in the prices of its products or simply to
encourage it to hire labour (as in the case of a wage subsidy).
1.1 BRIEF HISTORY OF OIL AND GAS IN NIGERIA
Oil and gas operation commenced in Nigeria effectively in 1956, with the first commercial
firm in that year by the then Shell D’Arcy. Before November 1938, almost the entire country
was covered by a concession granted to the company to explore for petroleum resources. This
dominant role of Shell in Nigeria oil industry continued for many years, until Nigeria’s
membership of the Organization of Petroleum Exporting Countries (OPEC) in 1971, after
which the country began to take a firmer control of its oil and gas resources, in line with the
practice of the other members of OPEC. This period witnessed the emergence of National Oil
Companies (NOCs) across OPEC member countries, with the sole objective of monitoring
the stake of the oil-producing countries in the exploitation of the resources. Whereas in some
OPEC member countries the NOCs took direct control of production operation, in Nigeria,
the Multinational Oil Companies (MNOCs) where all allowed to continue with such
operations under Joint Operating Agreements (JOA) which clearly specified the respective
stakes of the companies and the Government of Nigeria in the Ventures. This period also
witness the arrival on the scene of other MNOCs such as Gulf Oil and Texaco (now
ChevronTexaco), Elf Petroleum (now Total), Mobil (now ExxonMobil), and Agip, in
2
addition to Shell, which was already playing a dominant role in the industry. These other
companies were also operating under JOAs with NNPC (Nigerian National Petroleum
Corporation), with varying percentages of stakes in their perspective acreages (land area). To
date, the above companies constitute the major players in Nigeria’s oil industry, with Shell
accounting for just little less than 50percent of Nigeria’s total daily production, which
currently stands about 2.4 million barrels of oil per day. JOAs are also still dominant in the
oil industry in Nigeria, accounting for over 90percent of total oil and gas production in
Nigeria today.
The Nigerian oil sector can be categorized into three main sub-sectors, namely, upstream,
downstream and gas. The most problematic over the years has been the downstream sector,
which is the distribution arm and connection with final consumers of refined petroleum
products in the domestic economy. The unceasing crisis in supply of products culminated in
the decision by the Government in 2003 to deregulate (privatize) the downstream sub-sector.
However, the manner of its implementation has been controversial because it ignores the
economic realities in Nigeria. Oil production by the joint venture (JV) companies account for
95percent of Nigeria’s crude oil production. Shell, which operates the largest joint venture in
Nigeria, with 55percent Government interest (through the Nigerian National Petroleum
Corporation, NNPC), produces about 50percent of Nigeria’s crude oil. ExxonMobil,
ChevronTexaco, ENI/Agip and Total/Elf operate the other JV’s, which the NNPC has
60percent stake. The over-dependence on oil has created vulnerability to the vagaries
(unexpected change) of the international market.
Government however subsidized the oil and gas industry so as to reduce the price of fuel
payable by the masses. The removal, reduction or restructuring of such subsidies is helpful
for the environment and the economy at the same time.
1.2 HISTORY OF FUEL SUBSIDY IN NIGERIA
The history of issues on fuel subsidy in Nigeria dates back to April 1982 when Ibrahim
Babangida’s government raised the price of a litre of fuel from 15.3kobo to 20kobo. He did it
again on March 31, 1986, from 20k to 39.5k; on April 10, 1988, from 39.5k to 42k. On
January 1, 1989, he increased the price from 42k to 60k (although the regime said it was for
private vehicles only, but the price remained 42k for commercial vehicles). On December 19,
1989, it moved to a uniform price of 60k. On March 6, 1991, the price of a litre of fuel was
increased from 60k to 70k and that was the price when he stepped aside in August 1993.
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Chief Ernest Shonekan increased the price of a litre of fuel from 70k to N5 on November 8,
1993 but a hectic mass protest, saw Abacha take over power. The incoming Abacha regime
reduced the increment to N3.25 on November 22, 1993. On October 2
nd
1994, the Abacha
junta increased the price of fuel to N15, from N3.25 but after massive street protests, the
regime reduced the increment to N11 on October 4, 1994. That was the price till Abacha
passed on, and the Abdulsalami Abubakar caretaker regime raised the price from N11 to N25
on December 20, 1998 and after days of sustained protests, it was forced to reduce the
increment to N20 on January 6, 1999. The Obasanjo’s presidency adopted fuel subsidy as the
bedrock of its economic policy, for no sooner than it was sworn in that it effected an
increment to N30 on June 1, 2000 but protests and mass rejection forced it to reduce the
increment to N25 on June 8, 2000 and further down to N22 on June 13, 2000. The regime
was again to increase the price to N26 on January 1, 2002 and again to N40 on June 23, 2003.
He was to raise it up to N70 by the time he left in May 2009 but the incoming Yar’Adua
regime reduced it to N65, after general protest against the new price regime. Although the
Yar’Adua government made efforts to increase the price of petroleum products it could not
scale through following increased mass disapproval for such act.
Presently, the Goodluck Jonathan administration has removed fuel subsidy which the
administration claims will save it N1.3trillion to N1.5trillion annually which it will channel
into infrastructural development (Lawson, 2012).
The purpose of this study is to examine the impact of such removal on the economy as a
whole.
2.0 LITERATURE REVIEW
2.1 WHAT IS FUEL SUBSIDY?
A subsidy is an assistance paid to a business or economic sector mainly by the
government to prevent the decline of that industry (Todaro and Smith, 2009). On the other
hand, the Oxford Advanced Learners Dictionary (2001) defined a subsidy as money that is
paid by a government or an organization to reduce the cost of services or of producing goods
so that their prices can be kept low. In addition, Bakare (2012) points out that to subsidize is
to sell a product below the cost of production. Within the Nigerian context, fuel subsidy
means to sell petrol below the cost of importation.
Subsidy may also be used to refer to government actions which limit competition or raise
the prices at which producers could sell their products, for example, by means of tariff
protection. Although economics generally holds that subsidies may distort the market and
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produce inefficiencies, there are a number of recognized cases where subsidies may be the
most efficient solution. Examples of industries or sectors where subsidies are often found
include utilities, gasoline in the United States, welfare, farm subsidies, and (in some
countries) certain aspects of student loans.
In standard supply and demand curve diagrams, a subsidy will shift either the demand curve
up or supply curve down. A subsidy that increases the production will tend to result in a
lower price, while a subsidy that increases demand will tend to result in an increase in price.
Both cases result in a new economic equilibrium. Therefore it is essential to consider
elasticity when estimating the total cost of a planned subsidy: it equals the subsidy per unit
(difference between market price and subsidized price) times the new equilibrium quantity.
One category of goods suffer less from this effect: Public goods are-once-created in ample
(more than enough) supply and the total cost of subsidies remain constant regardless of the
number of consumers; depending on the form of the subsidy, however, the number of
producers on demanding their share of benefits may still rise and drive cost up.
2.1.1 TYPES OF SUBSIDY
There are many different ways to classify subsidies, such as the reason behind them, the
recipients of the subsidy, the source of the funds (government, consumers, general tax
revenues, etc.). In economics, one of the primary ways to classify subsidies is the means of
distributing the subsidy.
In economics, the term subsidy may or may not have a negative connotation: that is, the use
of the term may be prescriptive descriptive. In economics, a subsidy may nonetheless be
characterized as inefficient relative to no subsidies; inefficient relative to other means of
producing the same results; “second-best”, implying an inefficient but feasible solution
(contrasted with an efficient but not feasible ideal), among other possible terminology. In
other cases, a subsidy may be an efficient means of correcting a market failure.
For example, economic analysis may suggest that direct subsidies (cash benefits) would be
more efficient than indirect subsidies (such as trade barriers); this does not necessarily imply
that direct subsidies are bad, but that they may be more efficient or effective than other
mechanisms to achieve the same (or better) results.
Insofar as they are inefficient, however, subsidies would generally be considered by
economists to be bad, as economics is the efficient use of limited resources. Ultimately,
5
however, the choice to enact subsidy is a political choice. Note that subsidies are linked to the
concept of economic transfers from one group to another.
Economic has also explicitly identified a number of areas where subsidies are entirely
justified by economics, particularly in the area of provision of public goods.
Labour Subsidies
A labour subsidy is any form of subsidy where the recipients receive subsidies to pay for
labour cost. Examples may include labour subsidies for workers in certain industries, such as
film and/or television industries.
Infrastructure Subsidies
In some cases, subsidy may refer to favouring one type of production or consumption over
another, effectively reducing the competiveness or retarding the development of potential
substitutes. For example, it has been argued that the use of petroleum, and particularly
gasoline, has been subsidized or favoured by U.S. defense policy, reducing the use of
alternative energy sources and delaying their commercial development. However, alternative
energy sources have also been subsidized by the federal and state governments, though only
by a comparatively tiny amount.
In other cases, the government may need to improve the public transport to ensure Pareto
improvement is attained and sustained. This can therefore be done by subsidising those transit
agencies that provide the public services so that the services can be affordable for everyone.
This is the best way of helping different groups of disabled and low income families in the
society.
Trade Protection (import restriction)
Measures use to limit a given good than they would pay without the trade barrier; the
protected industry has effectively received a subsidy. Such measures include import quotas,
import tariffs, import bans, and others.
6
Export Subsidies (trade promotion)
Various tax or other measures may be used to promote exports that constitute subsidies to the
industries favoured. In other cases, tax measures may be used to ensure that exports are
treated fairly under the tax system. The determination of what constitutes a subsidy (or the
size of that subsidy) may be complex. In many cases, export subsidies are justified as a means
of compensating for subsidies or protections provided by a foreign state to its own producers.
Procurement Subsidies
Government everywhere are relatively small consumers of various goods and services.
Subsidies may occur in this process by choice of the products produced, the producer, the
nature of the product itself, and by other means, including payment of higher-than-market
price for good purchased.
Consumption Subsidies
Government everywhere provide consumption subsidies in a number of ways: by actually
giving away a good or service, providing use of government assets, property, or services at
lower than the cost of provision, or by providing economic incentives (cash subsidies) to
purchase or use such goods. In most countries, consumption of education, health care, and
infrastructure (such as roads) are heavily subsidized, and in many cases provided free of
charge. However, these are investment rather than subsidies; both increase the economic
value of the state and affect all as opposed to single groups. In other cases, government
literally purchase or produce a good (such as bread, wheat, gasoline, or electricity) at a higher
cost than the sales price to the public (which may require rationing to control the cost).
The provision of true public goods through subsidies is an example of a type of subsidy that
economics may recognize as efficient. In other cases, such subsidies may be reasonable
second-best solutions; for example, while it may be theoretically efficient to charge for all
use of public roads, in practice, the cost of implementing a system to charge for such use may
be unworkable or unjustified.
In other cases, consumption subsidies may be targeted at a specific group of users, such as
large utilities, residential home-owners, and others.
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2.2 GENERAL OVERVIEW OF OIL AND GAS IN NIGERIA
Gas prices affect all Nigerians, both the wealthy and the poor, and the Central Intelligence
Agency's (CIA) World Factbook estimates that as at 2000, 60percent of Nigerians live on less
than a dollar a day. This is a huge number considering that the World Bank estimates that
Nigeria has a population of 135.6 million as at 2003 and the last population census conducted
in 2006 estimates that Nigeria has a population of over 180 million.
“Disruptions in the Nigerian downstream sector have deeper and more immediate domestic
political implications for the country than those that may occur in the upstream sector”
(Khan, 1994).
An Executive in one of the bank, Ms. Comfort Umoh, said, “This goes to show that the
government we have is not people-friendly, rather, it is what will be beneficial to the few
people in government that matters at the end of the day.”
She further said, “It is not fair! Why won’t the government do a survey on issues before
taking a decision? The consumers will definitely suffer the removal of fuel subsidy. This is a
major oversight. In a country like Nigeria, where more than half of the population lives on
less than one dollar per day, it is important to evaluate policies that may raise poverty levels.”
“Moreover, it is critical to evaluate such effects before implementing the policies so that
complementary reforms, where necessary, can be put into place to address the burden on the
poor,” she noted.
Umoh argued that the position of the government’s fiscal policy following subsidy removal
would be important in determining the effects of poverty on the citizens.
A Human Resource expert, Mr. Chidi Nwankwo, stated that the removal of fuel subsidy
would limit the country’s ability to attain the first Millennium Development Goal, which is
reducing the number of people living in poverty by 2015.
He also said this was at odds with global concern for the low level of economic growth and
recently reported declining human development index in the country.
He added that it was also smacked of double standards in the current patterns of state
intervention in free markets.
8
He said, “It is obvious that the pressure to remove subsidy is designed by experts with
insufficient understanding of the Nigerian economy or who choose to ignore the inability of
the government to effectively implement anti-poverty programmes planned as a wider
element of a fiscal policy agenda.”
The suspended CBN (Central Bank of Nigeria) governor (Lamido Sanusi) had in Washington
said that subsidy removal will pose a challenge to monetary policy authority due to its
inflationary impact in the short run. He said “though the Ministry of Finance has plans to rein
in government spending, it can be realised in the medium of long term. In practice, fiscal
retrenchment cannot hold in the short term”.
According to him, “the monetary authority has been battling with excess liquidity which is
causing inflation and undue pressure on the exchange rate of the Naira and interest rates”. He
said that, “subsidy removal though desirable, will pose a great challenge to monetary policy
authority because in the short run, the immediate impact of the removal will be on price of
goods and services”. This he said has the potential of pushing up prices of goods and services
in the country. He said in the interest of the economy and the nation, there is the urgent need
for greater collaboration and coordination between fiscal and monetary authorities to deliver
better policies to move the economy forward.
However, following the latest resolve by Federation Accounts Allocation Committee (FAAC)
to stop the subsidy deductions, General Secretary of Petroleum and Natural Gas Senior Staff
Association of Nigeria (PENGASSAN), Mr. Bayo Olowoshile had urged President Goodluck
Jonathan to jettison the resolution.
Describing FAAC decision as unacceptable to the union, he argued that removing the subsidy
without any corresponding increase in purchasing power of individuals could constitute a
negative multiplier effect on all aspects of the economy.
“Government must ensure of the turn around maintenance of all the refineries before
removing the subsidy. We told government at a meeting we held in January that certain
conditions must be met before the removal. Government must fix the four refineries and build
new ones. The corruption associated with supply and distribution of petroleum products in
the downstream sector of the oil industry must be eliminated.”
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CAPTION: INDIVIDUAL/GROUP SUPPORT FOR FUEL SUBSIDY REMOVAL
Former President of Lagos Chamber of Commerce and Industry Otunba Femi Deru in a
position paper said: “The Lagos Chamber of Commerce and Industry, is even more worried
over the horrific cost of sustaining the current system especially through the following
channels: subsidy on imported petroleum products, which runs into hundreds of billions of
Naira through the Petroleum Support Fund (PSF); Colossal sum of tax payers’ money spent
on bridging of petroleum products through the petroleum Equalization Fund (PEF); Profound
integrity and transparency issues associated with management of subsidies, the bridging
funds and refineries.
“This spending pattern poses very grim consequences for the economy. Worse still, most of
the expenditure was not appropriated by the National Assembly. It is a major economic
governance challenge. In the light of the foregoing, the following steps should be taken to
ensure a virile and sustainable downstream oil sector. An exit strategy for all public
enterprises should be immediately worked out to stop them from direct production,
procurement, distribution and marketing of petroleum products; The Petroleum Equalization
Fund should be scrapped; there should be creative incentives for the private sector to set up
refineries both for domestic consumption and for export; private sector agencies should be
engaged to manage and maintain the pipelines; The refineries should be immediately
privatized, with labour issues adequately addressed; The NNPC should disengage completely
from retailing petroleum products. The on-going acquisition of retail outlet by the NNPC is
totally inconsistent with the proposed reform in the sector. Retail outlets, is the least of the
10
problems in the sector. The commitment of the public funds to the acquisition of retail outlets
is absolutely unacceptable; there should be a strong regulatory institution with clear
guidelines to guide investors in the sector and protect the interest of the consumers.
The outcome of the adoption of the foregoing is greater private investment in refineries,
procurement, distribution and marketing of petroleum products in the economy. Also, the
economy would save huge sums of money currently being disbursed as subsidy and bridging
funds and be rescued from the massive rent seeking activities and economic parasites in the
downstream sector.”
Dr. Simon Chukwuemeka Okolo former president of NACCIMA (Nigerian Association of
Chambers of Commerce, industry, Mines and Agriculture) said “We support real
deregulation that will increase private sector participation in the downstream oil sector not
government increase of pump price.”
The FAAC during its meeting in March 2014, constituted a sub-committee to among other
things investigate and enlighten members on the performance of the existing subsidy scheme.
Consequently, at its plenary about same period, it finally took a decision, after being briefed
by the ad hoc investigation committee that petroleum subsidy should be scrapped in its
entirety “because we’ve discovered it is more or less a solution worse than the problem it
tends to solve.”
The decision by the states to throw their weight behind the removal of fuel subsidy, gathered
may not be unconnected with the continued decline in monthly statutory mineral revenue
occasioned by oil theft, bunkering and other distortion in production activities. As a result,
allocations from the federation account no longer suffice to execute the infrastructural needs
of the states and local governments which are unable to provide the much-needed jobs and
execute people-oriented contracts with little resources.
Documents showed that monthly net statutory allocations to states had been on a decline in
recent times averaging about N1.5 billion from between about N2 billion in some states.
The onus continued to fall on governments at the regions to deliver on campaign promises to
justify their election into public offices by the people.
11
Essentially, the states argue that the huge chunk of money which is continually set aside to
offset fuel subsidy claims were better given directly to the respective states so the resources
could be better administered to solve the plight of the people by prioritising their needs.
3.0 FINDINGS (Personal views)
3.1 SUBSIDY REMOVAL: POSITIVE IMPACT ON THE ECONOMY
The removal would create job opportunities through establishment of refineries. There would
also be free funds for governments to use in other sectors of the economy (such as the
abandoned agricultural sector, education, especially infrastructural development, and also
create economics of scale)
Oil industry analysts have said that removing the subsidy on petroleum product will engender
more activities in the downstream sector of the country’s oil and gas industry, and fast track
the development of the larger economy.
According to findings of this study, investors who have before now turned their back on the
country, as regards the establishment of refineries, would be encouraged to put in place
refineries that are viable, since they would get returns on their investments.
This study also found out that if the investors pumped money into the sector, it would also
lead to competition among marketers (as a result of free market operation) and the price of
the product would begin to come down, because the market would be flooded with the
product as a result of completion.
It will reduce borrowing, no doubt because there will be more money in government’s
account.
This research further found out that if the government removed the subsidy in one swoop, the
price or Premium Motor Spirit (PMS) would escalate (go up) thereby creating a temporary
inflation. Thus, the price would soon normalize however, when the market became saturated
and removing the subsidy, would be good for the country and the economy
In the same vein, if the subsidy was removed, it would boost the nation’s economic activities
and engender competition among marketers. At least, with the removal, the government
would have been able to take care of some other social commitments and enhance the quality
of our roads and provide good security for her citizens.
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3.2 SUBSIDY REMOVAL: NEGATIVE EFFECTS ON THE ECONOMY
Subsidy removal is not good for the country because it will bring a lot hardship to the
generality of Nigerians. The government is always eager to get more money but it will be
better to leave the subsidy as it was.
Removing fuel subsidies will inevitably send prices of petroleum products shooting up, with
petrol costing up to N100 per litre from the normal initial price of N65. So when you are
moving from N65 to N100 (which is about 100percent increase in price). One can imagine
what will happen in the economy and the country of such insecurity and high unemployment
level. It is not going to affect the workers alone; a lot of factories will wind-up. When power
supply is still epileptic despite the heavy bill the private owners of PHCN (Power Holding
Company of Nigeria) impose on the masses without supply of electricity, these are issues.
Small scale business will be wiped out and the remaining industrial concerns will further
relocate out of Nigeria, the cost of transporting food from the hinterland will further escalate
in the face of deplorable roads worsening the prevailing food and job insecurity. The
researcher is of the believe that there is so much corruption around the subsidy matter. If
there is corruption around the subsidy matter, the government should bring those behind the
corruption to book (we all witnessed the Farouk Lawan vs Otedola’s case etc…Nigerians are
still expecting results from the government). There is also fear or lack of guarantees that these
same cartels, when it now becomes an open market will not device a means and take charge
of the market, which we have been seeing come to play lately.
Finally, it will impose a high cost of living on the people. It will cause inflation,
unemployment, closure of factories, discourage entrepreneurs. This can result to another
economy recession which this study kicks against.
4.0 SUMMARY AND CONCLUSION
There is sociological economic implication of the removal of subsidies that must be taken
into consideration. The transportation industry will be adversely affected with higher price of
petrol. They (Transporters) will pass down the burden and cost to the consumers. The price of
food and consumable items will go high and so inflation. The masses too have a
responsibility of recognizing that the fuel subsidies cannot last forever and they must begin to
see that the privilege is not right and subsidy is not a sacred cow that is untouchable.
13
The only thing that most Nigerians can point out as a show of the country’s oil wealth is
affordable fuel including petrol and kerosene. The price of kerosene is affordable; now the
government in its all wisdom went ahead and interrupt such a program without first making
another provision to the suffering masses.
Nigerians recognizes that over-spending, over-borrowing and wastefulness must be
restrained, controlled and restricted, but we must also acknowledge that in spite of the
economic theories of sound management; Nigeria has a sizeable majority of her people that
live in poverty and massive depravity. These people must be attended to therefore, the
mopping of liquidity and removal of fuel subsidies must not have preference over human
suffering.
4.1 RECOMMENDATION
In this research work, it is believed that the removal of government subsidies from oil and gas
companies would bring a lot of harm than good to the economy as a whole. However, some
of the reasons behind these include:
Federal government should continue in subsidizing oil and gas sector due to the fact
that despite the cry of the federal government for lack of cash, there are still a lot of
other ways which government can raise funds, for example; reducing the number of
its cabinet which seems less productive in discharging their duties. Every year,
government always disclose excess crude oil income which can also be tailored or
managed in the creation of social amenities.
The removal of government subsidy with the aim of investing in other sector of the
economy, there might be opportunity of misappropriation of funds, which will still
invariably affect the economy adversely.
If the Nigerian government believe in moving forward with effected petroleum
subsidy removals, they need to pay attention to the effects of inflation and
manipulations on consumer prices, currency deprecation, the effects of CBN monitory
polices, introduction of cashless systems High unemployment and insecurity
Finally, the researcher recommends this research work for further study.
14
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