While delivering his inauguration speech, President Bola Ahmed Tinubu announced the removal of the fuel subsidy. In the days that followed, NNPC Limited, Nigeria’s state-owned oil company announced an increment in fuel prices in its filling stations nationwide and others followed suit. Transportation fares tripled, and the cost of goods and services shot up – basically, the cost and standard of living of Nigerians changed.
What is Fuel Subsidy?
‘Subsidy’ has been one of the most used words in the past couple of days, still, many do not understand what its removal truly means or what it bodes for them. All they know is that they are experiencing multidimensional hardship due to its removal. Dumebi Oluwole, an Economics Analyst at Stears, explains what subsidy removal is: “A subsidy is a government incentive targeted at households, consumers and businesses to keep the prices of a product relatively affordable. The government does this by paying the difference between the cost price and its fixed price. Subsidies are good but often are temporary measures the government places to encourage business output and spur consumer spending. If businesses can expand on strong demand, their output will keep increasing until they can stand on their own. The keyword to remember, though, is that subsidies are temporary. They work as catalysts to jump-start this virtuous circle.”
Jennifer Awirigwe, a personal finance expert, investment banker, and the founder of FinTribe gives an anecdote that describes the fuel subsidy: “This litre of fuel is originally
N100, but you pay N50 because the government has deposited N50 on your behalf. That’s fuel subsidy. Instead of paying the actual price for fuel, we have been paying part while the government handled the balance.”
Jennifer says that the idea of fuel subsidy is to make fuel affordable for every Nigerian, which is a good thing. But now, the government can no longer afford to do so, and the citizens will have to pay the full price. What are the implications of this on the standard of living of Nigerians?
Darkness Before Sunset
Jennifer says of this removal, “It will not be easy. There will be darkness before sunset. Prices will jump up. It’s not just the price of fuel and transportation, other things will be affected. As the cost of doing business is going up, the cost of living will go up. For most people, expenses have gone up, yet income remains the same. This will lead to less disposable power at your disposal.”
Dumebi emphasises that subsidy removal is much needed to reform Nigeria’s creditors. “There are two answers to the implications of this subsidy removal. But before I get there, it is important to mention that before ripping the bandaid off by removing subsidies overnight, social safety nets (like palliatives) should have been in place to cushion the impact on Nigeria’s poor and vulnerable. The first implication is what happens in the short term (1-2 years). We are already seeing the impact. Fuel prices will be high, feeding into food and transport costs. The deal is that the cost of living for Nigerians will worsen. On a national level, inflation will skyrocket, further draining the value of people’s incomes. The second implication is what should happen in the medium term (3-5 years). The expectation is that as subsidy is removed, fuel prices will become more cost-reflective, encouraging healthy competition amongst marketers in Nigeria’s downstream petroleum sector. When prices are cost-reflective, and the government’s control of the sector is removed, we should see some investments in that sector (downstream).
If everything goes according to plan, all petroleum products (including fuel) will increase, causing prices to fall. Nigerians will now enjoy an ample supply of petrol at affordable prices. Moreso, this will make the downstream sector a monopolistic competitive market where prices could be slightly differentiated among producers (or marketers) who now have a certain degree of control over their own prices as it depends on their cost of production (or getting the products).”
Dumebi further explains that demand and supply will determine the market prices of fuel, and consumers will have many options. For instance, an individual now gets to choose from, say, ABC (selling at ₦150/litre) or XYZ (₦100/litre) or 123 (₦170/litre), and so on.
Jennifer also maintains that the money reserved for subsidy will now be pumped into other areas like education, healthcare, and infrastructure. If this is done, it will improve our economy and reflect on our pockets. That way, no matter the price of fuel, we can afford it.
Whether or not the subsidy removal may be of advantage in the coming years, it is clear that Nigerians will have to make certain changes to their lifestyle, especially when it comes to navigating the cost of living.
Surviving through the subsidy
Jennifer highlights that we can make slight changes in our everyday lives to cushion the effect of the price hike. Two ways to look at this, she says, is to spend less and earn more.
On spending less, she urges Nigerians to “get on this immediately because now the things your money can afford before, it can’t anymore. Review your budget and your debit alerts. Ask yourself where your money goes. Can you reduce the weekly hangout to once a month? Are there subscriptions you can deactivate? Consider getting cost-saving appliances in your home like investing in an inverter. It will save you a lot on fuel. Which areas can you cut costs to free up cash? If you have not been working with a budget, you need one now. You need to carefully allocate your available funds.”
On earning more, she urges Nigerians to “start thinking about creating new sources. Is there a skill or knowledge you can monetise? Is there one you can learn and offer for money? Can you start a side business? Can you expand your products/services to new a audience?”
Dumebi believes that the government, corporates and individuals all have their roles to play. The government “has to make sure that social safety nets are available to people to help with the higher cost of living. They must make sure that other things like electricity are stable to avoid people spending so much money on fuel. State governments, in particular, must ensure that transport workers are not overly extortive with transport fares, and this also means the informal taxation these transporters face is put in check.”
At the corporate level, Dumebi urges companies to provide allowances to staff members to cover some of these higher expenses. Also, if hybrid or work-from-home work practices are possible, companies should let it happen. This way, both the company and staff members are shielded from high running costs. For SMEs who will likely struggle with the high cost of operations, it simply means they will increase their prices. People who can afford their products will continue to buy. But they must prepare for the harsh realities of lower sales volume.
As for individuals, Dumebi says, the sad reality is that these costs will not disappear overnight. People will have to live within their already tiny means and plan for additional sources of income. “If the government does the right thing by providing needed infrastructure that will woo investors, post the subsidy removal, things should get better with time,” she says.
Many thanks to Dumebi and Jennifer for having this explainer. Are you interested in becoming a BellaNaija contributor? We want to read from you. Send an email to [email protected]