By Lekan Yusuf
On May 29, 2023, President Bola Tinubu announced the removal of Nigeria’s fuel subsidy in his inaugural speech, stating, “Fuel subsidy is gone.” This decision, aimed at addressing the unsustainable fiscal burden of subsidies (costing over $10 billion annually), was coupled with other economic reforms, notably the unification of Nigeria’s foreign exchange rates. Below is an analysis of the Tinubu administration’s economic policies post-subsidy removal and their impacts, based on available data.
Key Economic Policies Post-Subsidy Removal
1. Fuel Subsidy Removal:
Details:
The subsidy, in place since the 1970s, was eliminated, leading to a surge in petrol prices from ₦185 ($0.40) to ₦537 ($1.15) by June 2023, and further to ₦998-₦1,200 by late 2024. The policy aimed to free up fiscal resources, reduce corruption, and encourage domestic refining.
Partial Reinstatement: By late 2023, the government quietly reintroduced partial subsidies on fuel and electricity to curb inflation, as noted by the IMF. This partial rollback was less transparent and complicated fiscal planning.
2. Foreign Exchange Market Liberalization:
Details:
The administration unified Nigeria’s multiple exchange rates, allowing the naira to float. This led to a depreciation of over 50%, from ₦450/$ in January 2023 to ₦1,035/$ by December 2023.
Purpose:
To attract foreign investment, clear foreign exchange backlogs (over $4 billion), and align the currency with market realities.
3. Fiscal and Tax Reforms:
Presidential Fiscal Policy and Tax Reforms Committee:
Established to boost domestic revenue through tax reforms, aiming to fund infrastructure, health, and education.
Debt Management:
The government shelved plans to borrow from international markets due to high Eurobond yields, relying instead on domestic bonds to finance deficits.
4. Social and Economic Interventions:
Palliatives:
A ₦500 billion package was announced, including mass transit buses, cheap loans to farmers and small businesses, and cereal releases from grain reserves to address food insecurity.
Subsidized Inputs:
Subsidized fertilizers were provided to farmers, and VAT on diesel was suspended to ease business costs.
Civil Service Wage Award:
Temporary wage increases for civil servants to cushion inflation’s impact.
5. Monetary Policy Shift:
- The Central Bank of Nigeria (CBN) under new leadership prioritized price stability, moving away from development finance roles. Aggressive monetary tightening was implemented to control inflation.
Economic and Social Impacts
The subsidy removal and associated policies had profound effects, with both positive and negative outcomes:
1. Positive Impacts:
Fiscal Savings:
Nigeria saved over ₦1 trillion ($1.32 billion) in just over two months post-subsidy removal, reducing the fiscal deficit and reliance on borrowing. The World Bank estimated savings of up to ₦3.9 trillion in 2023.
Incentives for Domestic Refining:
The policy encouraged private refineries, notably the Dangote Refinery, to increase local production, potentially reducing Nigeria’s dependence on imported fuel.
Infrastructure and Social Investment Potential:
The government promised to channel savings into infrastructure, education, and healthcare, though implementation has been slow.
Reduced Corruption:
Subsidy removal curbed opportunities for fraud, as past subsidies were riddled with mismanagement (e.g., a $6 billion fraud uncovered in 2012).
Environmental Benefits:
A 30% decrease in daily fuel usage (20 million liters) was reported, equivalent to a reduction of 42,800 tonnes of CO2 emissions, aligning with climate goals.
2. Negative Impacts:
Inflation Surge:
Inflation reached a 28-year high of 28.9% in December 2023, with food inflation at 33.9%. By September 2024, inflation hit 32.7%, driven by higher fuel and transport costs. Essential commodities became unaffordable for many.
Increased Poverty:
The World Bank reported Nigeria’s poverty rate rose from 44% in 2021 to 46% in 2023, affecting 104 million people, exacerbated by subsidy removal and naira depreciation.
Cost-of-Living Crisis:
Petrol price hikes (over 200%) led to transport fares doubling (e.g., from ₦400 to over ₦1,000), affecting students, workers, and businesses. Food prices soared due to higher production and transport costs, impacting agriculture and food security.
Business Challenges:
High fuel costs reduced profitability for businesses, especially in transportation and manufacturing, leading to job losses and closures. Small and medium enterprises, like block-making industries, were particularly hit.
Social Unrest:
Widespread protests and strikes by labor unions (e.g., Nigeria Labour Congress) occurred, demanding a reversal of price hikes. Public frustration grew due to perceived inadequate government support.
Fuel Scarcity and Queues:
Despite higher prices, fuel availability remained an issue, with long queues at filling stations, disrupting daily life.
Educational Impact: School fees in tertiary institutions increased by over 100% due to higher operational costs, affecting students’ access to education.
3. Mixed Outcomes:
Naira Depreciation:
The naira’s 50%+ depreciation boosted export competitiveness but increased import costs, worsening inflation and living costs.
Palliative Effectiveness:
The ₦500 billion palliative package had limited reach and was criticized as insufficient. Temporary measures like cereal releases and wage awards failed to address long-term needs.
NNPCL’s Financial Strain:
The Nigerian National Petroleum Company Limited (NNPCL) faced debts due to partial subsidy reinstatement and unprofitable refineries, limiting its ability to support fiscal recovery.
Critical Analysis of Tinubu’s Approach
Strengths:
- Bold reforms addressed long-standing fiscal issues, aligning with IMF and World Bank recommendations.
- Savings from subsidy removal provided potential for long-term investments in critical sectors.
- Encouraging domestic refining could reduce Nigeria’s $20 billion annual fuel import bill.
Weaknesses:
Abrupt Implementation:
The sudden removal without adequate shock-absorbing measures (e.g., cash transfers, robust safety nets) exacerbated hardship, unlike successful gradual reforms in Indonesia or the Philippines.
Inadequate Palliatives:
The ₦500 billion package was poorly implemented, with limited reach to vulnerable groups, leading to public distrust.
Lack of Transparency:
Partial subsidy reinstatement in late 2023 was not clearly communicated, undermining credibility.
Insufficient Public Engagement:
Unlike Malaysia, Nigeria’s government failed to effectively communicate reform benefits, fueling protests and criticisms.
Economic Context:
The simultaneous liberalization of the forex market amplified inflation, making the subsidy removal’s impact more severe.
Recommendations for Nigeria (Based on Other Countries’ Success)
Adopt Gradual Phasing: Future adjustments should follow a phased approach with price caps, as seen in the Philippines, to manage inflation.
Expand Social Safety Nets:
Implement broad cash transfer programs, like Indonesia’s, targeting low-income households, students, and small businesses.
Transparent Reinvestment:
Establish a civil society oversight committee, as suggested by Brookings, to monitor and ensure subsidy savings are invested in infrastructure, health, and education.
Boost Domestic Production:
Accelerate support for local refineries (e.g., Dangote Refinery) to reduce import dependency and stabilize prices.
Public Communication:
Launch campaigns to explain long-term benefits, as Malaysia did, to gain public buy-in.
Conclusion
Countries like Indonesia, Malaysia, the Philippines, and Iran successfully balanced their economies post-subsidy removal by using gradual phasing, robust social safety nets, and reinvestment in productive sectors. Angola and Egypt, potentially following Nigeria’s 2023 reform, adopted similar strategies but faced challenges due to inadequate public preparation. In Nigeria, the Tinubu administration’s subsidy removal saved significant funds but triggered inflation, poverty, and unrest due to abrupt implementation and weak palliatives. Learning from global examples, Nigeria could improve outcomes by adopting gradual reforms, expanding targeted support, and enhancing transparency to rebuild public trust and achieve fiscal sustainability.
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