Many readers of this blog will be familiar with the pernicious consequences of fossil fuel subsidies -- and how difficult it is to get rid of them. My colleague John Campbell, a former U.S. ambassador to Nigeria, examines Nigerian President Goodluck Jonathan’s recent decision to remove the country’s fuel subsidy, and what this means for Nigeria’s people and economy. His post from his blog, Africa In Transition, is reposted below.
Nigeria has long subsidized fuel for its citizens. The cost of the subsidy is high, and economists and the international financial institutions have argued for many years that it significantly distorts the economy. Since the establishment of civilian government in 1999, consecutive presidents have sought to reduce or eliminate the subsidy. But such efforts have been scaled back or abandoned because of deep popular opposition. On occasion, proposals for curtailing the subsidy has led to strikes and serious riots in urban areas, such as Lagos.
In the budget for the coming year, President Goodluck Jonathan has left out the fuel subsidy—thereby abolishing it. Predictably, the house of representatives has demanded that the subsidy be returned to the budget. In the senate, some members are arguing that the budget is too high for the military and security services. The implication seems to be that if it were reduced, money might be found to continue to subsidize fuel. In any event, the debate is not yet over.
With Boko Haram in the North, the prospect of renewed militant activity in the Delta, and lack of security in Plateau state, why has the government decided to tackle a reform as difficult and contentious as the fuel subsidy now? The answer appears to be the prospect that the government could be short of money. Jonathan said that the fuel subsidy cost the government N1.2 trillion this year.
Eliminating or reducing the fuel subsidy –which covers kerosene as well as gas and oil—would have a ripple effect throughout the entire economy. Prices for a wide range of goods beyond fuel would likely increase. Outside Lagos and Abuja most of the population is impoverished, and reduction or elimination of the subsidy will have serious consequences for those individuals. Further, there is a moral dimension. The fuel subsidy is the principal way ordinary Nigerians benefit from the country’s oil wealth. The Roman Catholic archbishop of Abuja and former head of the Christian Association of Nigeria observes that the subsidy is a tiny resource transfer to the Nigerian people, who otherwise receive little or nothing from the current political economy. It is, therefore, morally justified, “no matter what the World Bank says.” (Notably, the most recent statement from the World Bank says that Nigeria should focus on fuel supply, not necessarily the fuel subsidy.)
Given such considerations, it is likely that the Nigerian federal government will seek to reduce, rather than eliminate, the fuel subsidy. If it does so, the challenge will be find a point that helps the government’s bottom line without driving people into the streets.