A CRITICAL STUDY OF THE INFLUENCE OF FUEL SUBSIDY REMOVAL ON THE NIGERIAN ECONOMY IN 2023.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

 Fuel subsidy reform is increasingly seen as an opportunity for consolidating public finances and fostering sustainable economic development.  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.

            Coherently,  oil subsidy remains one of the most intricate socio-economic policy issues in Nigeria.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. Subsequently, fuel subsidies have been implemented. 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in widespread protests, with the primary objective of urging the government to reinstate the subsidy that had been rescinded.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. Subsequently, the disbursement of fuel subsidies in Nigeria has experienced a substantial increase. After swearing-in on May 29, the President Bola Tinubu’s administration removed fuel subsidy in Nigeria. 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.

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. 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. 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 econmy

1.2 Statement of the problem

Despite the recent passing of the Petroleum Industry Act (PIA), the development of the oil and gas downstream sector has not reached the desired levels. Until now, the existing subsidy system and legal framework in the downstream sector tend to discourage investments. Nigeria spent a sum of over N11 trillion on rehabilitating the refineries from 2010 to date. The three moribund refineries have become burdensome for the government, prompting the need for their privatisation. The underutilization of Nigeria’s refineries not only impedes the country’s economic potential but also hinders job opportunities and local value creation. According to Evans,  Nwaogwugwu,  Vincent, Wale-Awe,  Mesagan, & Ojapinwa (2023), the structural underpinnings of Nigeria's economy introduce additional layers of complexity. The existing state of the country's refineries, coupled with a dependency on imported oil, elevates the risk of escalated fuel prices. The delicate balance between encouraging domestic refining capacities and managing consumer costs warrants a detailed examination, considering that the subsidy removal could amplify the challenges posed by an under performing domestic refining sector. Moreover, the subsidy removal's impact on public services and infrastructure requires thorough investigation. The anticipated redirection of funds from subsidies to public goods such as healthcare, education, and infrastructure holds the potential for positive transformation. However, the effective utilization of these funds and their equitable distribution must be closely scrutinized. Ensuring that the removal leads to tangible improvements in these areas without causing unintended negative consequences becomes a central concern.

In the literature, several studies have probed into the impacts of subsidy removal on economy. Harring et al., (2023) mentioned that The elimination of fuel subsidy brings both challenges and opportunities. The withdrawal of fuel subsidy led to a 150% to 200% surge in fuel costs (N 500 – 600) across the country. The Small and Medium-sized Enterprises (SMEs) are facing difficulties in accessing affordable power. Individuals and businesses have a stronger reason to see opportunities in clean energy by embracing cleaner options like electric vehicles, biofuels, or solar-powered technologies. The prevailing high cost of petrol will undoubtedly stimulate investments in affordable renewable energy infrastructure, leading to a greener economy and sustainable transportation systems. For instance, the buses in major cities globally are powered by Compressed Natural Gas (CNG). Rather than flaring gases indiscriminately, Nigeria’s 209.5 trillion cubic feet (tcf) of proven gas reserves is capable of powering vehicles which reduces operating cost by 30% and carbon footprints by 95%. According to Omotosho (2020), the elimination of fuel subsidies in Nigeria results in increased macroeconomic(Inflation, GDP, FDI) instability due to the escalation of energy costs and inflation. Also, Osunmuyiwa and Kalfagianni (2017) delve into the broader energy context, examining whether Nigeria's fuel subsidy reforms can act as a catalyst for energy transitions. Their research underscores that subsidy removal can lead to shifts in energy consumption patterns, affecting government revenue and expenditures through changes in the energy sector's dynamics.

While these previous studies have shed light on the economic and environmental consequences of various subsidy removal efforts, there is limited exploration of the  influence of fuel subsidy removal on the Nigerian economy  hence the motive of this study.

1.3  Objectives of the study

The objective of this study is focused on a critical study of the influence of fuel subsidy removal on the Nigerian economy . 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 influence of fuel subsidy removal on the Nigerian economy is broad, there is need  to delimit the study to measurable scope hence the researcher selected  staff of Ministry of Finance, Abuja which srves 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 theMinistry of Finance, Abuja  and the results of this study cannot be generalized for other states 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.