A CRITICAL EVALUATION ON THE IMPACT OF SUBSIDY WITHDRAWAL IN 2023 ON THE ECONOMIC GROWTH OF NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

 Globally, fuel subsidy reform is increasingly seen as an opportunity for consolidating public finances and fostering sustainable economic development. In Nigeria, oil subsidy remains one of the most intricate socio-economic policy issues. By definition, Ovaga and Okechukwu, (2022) stated that a fuel subsidy refers to a governmental policy that involves providing a reduction in the market price of fossil fuel, resulting in customers paying a lower amount than the prevailing market price for fuel. However when subsidies are implemented, citizens are able to purchase petroleum products at a price per litre that is lower than the prevailing market price. Arguably, Ozili and Ozen, (2021) mentioned that while the government's supply of welfare is praiseworthy, its economic impact may be limited. According to Antimiani, Costantini, & Paglialung (2023), a fuel subsidy refers to a policy implemented by the government that primarily focuses on the oil business. Its main objectives are to lower the cost of energy production, raise the price received by energy producers, or decrease the price paid by energy consumers.

Although Nigeria is recognized as a nation possessing abundant mineral resources, with particular emphasis on its substantial reserves of oil and gas. According to Okwanya, Moses, and Pristine (2023), it is evident that Fuel subsidy removal could save Nigeria around N7tn annually which could be channelled to infrastructure, education and health. For example, Ghana removed fuel subsidies in 2013, causing petrol, kerosene, diesel, and LPG prices to increase by 15% to 50% until reaching market levels by mid-September. They invested the savings into critical sectors. Furthermore, the country stands as the primary producer of crude oil within the area, with a production rate of 2.4 million barrels per day in 2020, accounting for approximately 24% of the continent's total petroleum output. However Nigeria did not profit from the surge in oil prices due to low oil output and the spike in fuel subsidy expenses. As Fuel subsidy was riddled with corruption, manipulation and mismanagement. The N3.92 trillion allocated for petrol subsidy between January 2020 and June 2022, surpasses the combined federal budgets for healthcare, education, and defence throughout the 30-month period. Nigeria spent about 10 trillion Naira on petroleum subsidies between 2006 – 2018. It gulped N5.82 trillion 2021 – 2022 and N3.36 trillion being proposed for the first six months of 2023. These figures indicate a significant drain on the government’s finances, impeding its ability to invest in crucial sectors which could bolster economic growth and people’s well-being.

Coherently,  the disbursement of fuel subsidies in Nigeria has experienced a substantial increase. Whereas fuel subsidies were initially implemented in Nigeria during the 1970s in direct reaction to the oil price shock experienced in 1973, in 1986, a partial removal of fuel subsidies took place.  In the year 2012, Kyle (2018) observed that the government implemented a sudden removal of fuel subsidies. This act resulted in widespread protests, with the primary objective of urging the government to reinstate the subsidy that had been rescinded. As a result of the extensive demonstrations, the administration proceeded to reintroduce the fuel subsidy in 2012.   Recently, in 2023, after swearing-in on May 29, the President Bola Tinubu’s administration removed fuel subsidy in Nigeria.  Subsequently after the fuel subsidy removal, Nigeria’s daily fuel consumption dropped from 66m to 40m; suggestive of actual daily consumption. Also, the pump price difference across the neighbouring countries is no longer that wide – creating a disincentive to smuggling.  According to Eweka et’al (2023) pump prices in the Republic of Benin rose from 450 CFA to 800 CFA approximately. The price difference between Nigeria and Benin Republic is less than N150 and approximately N200 per litre for some neighbouring West African countries. This decisive policy shift carries with it a multitude of implications that warrant rigorous investigation to comprehend its far-reaching consequences on the economy. The trade deficit of $20 million recorded in November 2022 from the low crude oil export receipts signals the urgency to jettison petrol subsidy, develop local production capacity and end fuel import dependency for a favourable balance of trade. Such a dilemma and tough decision. The government is confronted with either continuing the subsidy and deepening an unsustainable fiscal deficit or risk potential social and economic unrest by its removal. Notwithstanding, the subsidy had to go.

1.2 Statement of the problem

Notwithstanding the recent enactment of the Petroleum Industry Act (PIA), the progress in the expansion of the oil and gas downstream industry has not attained the anticipated benchmarks. To date, the prevailing subsidy structure and legislative framework within the downstream sector have exhibited a tendency to deter investment activities. From 2010 till the present, Nigeria has allocated a significant amount of funds, over N11 trillion, towards the rehabilitation of its refineries. The government is facing challenges due to the operational inefficiencies of the three declining refineries, which has necessitated the consideration of their privatization. In the face of the staggering fuel subsidy removal, the inadequate utilization of Nigeria's refineries not only poses a hindrance to the economic potential of the country but also restricts the production of job opportunities and local value.

Evans, Nwaogwugwu, Vincent, Wale-Awe, Mesagan, and Ojapinwa (2023) argue that the economic framework of Nigeria is characterised by intricate structural foundations, which contribute to heightened levels of volatility. The current condition of the nation's refineries, along with a reliance on imported oil, increases the likelihood of heightened fuel costs after the subsidy withdrawal. Conversely,  a comprehensive analysis is necessary to evaluate the intricate relationship between promoting local refining capabilities and effectively controlling consumer expenses. This investigation is crucial due to the potential exacerbation of difficulties associated with an underperforming domestic refining industry that may arise from the elimination of subsidies. Furthermore, it is imperative to conduct a comprehensive examination of the consequences of removing subsidies on public services and infrastructure. The potential for positive transformation lies in the expected reallocation of monies from subsidies towards public goods, including healthcare, education, and infrastructure. Nevertheless, it is imperative to thoroughly examine the efficient utilisation and fair allocation of these money. The fundamental problem revolves on ensuring that the removal process results in tangible gains in these areas, while also mitigating any unanticipated negative impacts.Numerous scholarly investigations have examined the effects of subsidy elimination on the economy.

According to Harring et al. (2023), the removal of fuel subsidies presents a range of obstacles and possibilities. The removal of the gasoline subsidy resulted in a significant increase in fuel prices, ranging from 150% to 200% (N 500 – 600), over the whole nation. Small and Medium-sized Enterprises (SMEs) have challenges when it comes to acquiring cost-effective electricity. There is a heightened incentive for both individuals and businesses to see the potential in clean energy through the adoption of environmentally-friendly alternatives such as electric cars, biofuels, or solar-powered technology. The current exorbitant price of fuel is expected to incentivize the allocation of resources towards the development of cost-effective renewable energy infrastructure, hence fostering the emergence of an environmentally-friendly economy and sustainable transportation networks. As an illustration, it is worth noting that the public transport systems in several metropolitan areas throughout the world utilise Compressed Natural Gas (CNG) as their primary source of electricity for buses. Instead of releasing gases without discrimination, Nigeria's confirmed petrol reserves of 209.5 trillion cubic feet (tcf) had the potential to fuel automobiles, resulting in a 30% reduction in operating costs and a 95% decrease in carbon footprints. Omotosho (2020) asserts that the removal of fuel subsidies in Nigeria leads to heightened macroeconomic instability, as seen by the rise in energy costs and inflation. In the study by Osunmuyiwa and Kalfagianni (2017) explore the wider energy landscape and investigate the potential of Nigeria's fuel subsidy changes to serve as a catalyst for energy transitions. The research highlights the potential impact of subsidy withdrawal on energy consumption patterns, which might have significant implications for government revenue and expenditures due to the resulting changes in the dynamics of the energy sector.

While these previous studies have shed light on the economic and implication of 2023 subsidy removal, hence the motive of this study is focused on a critical evaluation on the impact of subsidy withdrawal in 2023 on the economic growth of Nigeria.

1.3  Objectives of the study

The objective of this study is focused on a critical evaluation on the impact of subsidy withdrawal in 2023 on the economic growth of Nigeria. Other specific objectives includes:

i.          To examine whether  2023 fuel subsidy removal has effect on gross domestic product  in Nigeria

ii.        To investigate whether  2023 fuel subsidy removal has effect on inflation product  in Nigeria

iii.      To ascertain if   the  2023 fuel subsidy removal has significant influence on foreign direct investment in Nigeria

1.4       Research Questions

i.          Does  2023 fuel subsidy removal has effect on gross domestic product  in Nigeria?

ii.        Does  2023 fuel subsidy removal has effect on inflation product  in Nigeria?

iii.      Does 2023 fuel subsidy removal has significant influence on foreign direct investment in Nigeria?

1.5       Research hypotheses

Ho: There are no significant  influence of fuel subsidy removal on the Nigerian economy.

Hi:  There are significant influence of fuel subsidy removal on the Nigerian economy

1.6       Significance of the study

The study makes significant contributions to our understanding of the multifaceted implications of fuel subsidy removal. The study's holistic analysis and nuanced insights into the diverse dimensions of subsidy removal offer a comprehensive foundation for informed decision-making, fostering equitable economic growth, social welfare, and environmental sustainability. By providing a comprehensive analysis across economic, social, and environmental dimensions, the study equips policymakers with a nuanced perspective to navigate the complexities of subsidy reform. The findings offer valuable insights into potential challenges, opportunities, and the need for holistic approaches that balance economic development, social welfare, and environmental stewardship. Moreover, the study's implications extend beyond Nigeria's borders, serving as a reference point for other nations grappling with subsidy reform or seeking sustainable energy transition strategies. Researchers, policymakers, and stakeholders can draw from the synthesized findings to make informed decisions that align with global efforts toward mitigating climate change, fostering inclusive economic growth, and ensuring equitable societal outcomes.

Finally, it would contribute to existing literature on the subject matter and serves as an invaluable tool for students, academic institutions and individuals who would like to know about the issues of fuel subsidy in Nigeria.

1.7       Scope of the Study

Owing that making an investigation like this on a critical evaluation on the impact of subsidy withdrawal in 2023 on the economic growth of Nigeria is broad, there is need  to delimit the study to measurable scope hence the researcher selected  staff working under Federal Ministry of Industry, Trade and Investment  , Abuja which serves as the respondent for the study.

1.8 Limitation of the Study

During the course of the research,  few minor obstacles while conducting the study, just as in every scientific endeavour. It is worthy to note that the accuracy of the result will totally base on the data provided to the researcher by the Federal Ministry of Industry, Trade and Investment  and the results of this study cannot be generalized for other ministries in Nigeria. Time restrictions were also an issue because the researcher had to complete this research while still going to classes and performing other necessary educational tasks.  However all aspects were minimized in order to deliver the best results possible and ensure the success of the research, despite the limitations that were faced during the study.

1.9 Definition of Terms

Subsidy: Subsidy (subvention) is an amount of money paid by government to suppliers (providers or producers) of a product or service to enable them to sell their products or services to final consumers at a price determined by the government which is less than the true supply cost.

Fuel subsidy: Fuel subsidy is a government discount on the market price of fossil fuel to make consumers pay less than the prevailing market price of fuel.