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Format: MS WORD
| Chapters: 1-5
| Pages: 87
FUEL SUBSIDY REMOVAL AND NATIONAL DEVELOPMENT IN NIGERIA: 1999 – 2012
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Subsidy has been defined as aids directly granted by government to an individual or private commercial enterprise deemed beneficial to the public. It is also a grant or gift of money from a government to a private company, organization, or charity to help it function.
In relation to fuel in Nigeria, it means the financial aid granted to autonomous and foremost oil marketers by the government for them to supply their products at a cheaper rate for the good of the masses. This move is almost always aimed at boosting the economy of a country, providing social amenities for the people, stabilizing the market, creating employment opportunities and of course the assumption by the government that it is capable of fighting corruption. The Nigeria Extractive Industries Transparency Initiative (NEITI, 2011) notes that the issue of subsidy is not alien to the nation’s blood stream because it existed during the military regime when the four refineries of the nation could only produce little which could not even satisfy the domestic needs of the people.
Subsidy, in economic sense, exists when consumers of a given commodity are assisted by the government to pay less than the prevailing market price. In relation to fuel subsidy, it means that consumers would pay less than the pump price per litre of products. More so, fuel subsidy could be described as the difference between the actual market price of petroleum products per litre and what the final consumers pay for those same products. Indeed, developing countries have used petroleum products or fuel subsidies for consumers primarily as a means of achieving certain social, economic, and environmental objectives, as identified by Bazilian and Onyeji, (2012). These include alleviating energy poverty and improving equity, increasing domestic supply, national resource wealth redistribution, correction of externalities and controlling inflation. Subsidies were introduced in the Nigerian petroleum sector in the mid 1980’s.
Something of a creeping phenomenon, the value of the subsidies has gone from 1 billion Naira in the 1980s to an expected 6 billion Dollars in 2011. Nigeria is a country endowed with vast mineral resources prominent among which are the oil and gas reserves. The country possesses 28% of Africa’s proven oil reserves, second only to Libya; and is the largest producer of crude oil in the region, producing 2.4 million barrels per day in 2010 which is about 24% of the continent’s petroleum (Siddig, et al, 2013).
In addition, Nigeria has four refineries with an installed production capacity of 445,000 barrels of fuel per day, adequate to meet its domestic needs with a surplus for export (Explore, 2011). However, Nigeria is a large net importer of fuel and other petroleum products. In spite of efforts to revamp her economy via various reforms, which includes comprehensive non-oil export diversification initiatives, petroleum still contributes an average of 95% of the nation’s external earnings (Majekodunmi, 2013). The country increasingly relies on imported petroleum products because the existing refineries are producing below 20% of their installed capacity. In fact,the cost of importing petroleum products has risen so rapidly in recent years that the country’s capital expenditures and balance of payment are under threat (Adelabu, 2012).
According to Majekodunmi (2013), for five decades now, Nigeria’s economic growth and other related activities, (including living standards) have largely been influenced by the oil industry. The view that the economy is heavily dependent on the oil industry will amount to an understatement as the oil industry is nothing short of the life-blood of the Nigerianeconomy (Adelabu, 2012). The International Monetary Fund (IMF, 2013) indicates that Nigeria is the largest oil producing country in Africa and the sixth in the world. The country’s economic strength is derived largely from its oil and gas wealth, which contributes about 99 percent of government revenues and 38.8 percent of GDP (National Budget, 2010).
Despite these positive developments, successive governments in Nigeria have been unable to use the oil resources to significantly reduce poverty, provide basic social and economic services for her citizens (Ering and Akpan, 2012). Fuel subsidy was, before the coming of the Goodluck Jonathan’s administration, a policy of the federal government meant to assist the people of Nigeria to cushion the effects of economic hardship. However, the controversy over the removal of fuel subsidy was sparked off in June 2011 at the instance of Nigeria Governors’ Forum, which includes governors of the 36 federating states in Nigeria.
The Forum visited President Jonathan in the wake of the national debate over the payment of the new N18,000 minimum wage. The governors pleaded their inability to pay the new wage bill and suggested the removal of fuel ubsidy to ensure that more money accrues to the Federation Account, which will in turn be shared among the three tiers being federal, state and local governments. Nevertheless, the Chairman of the Forum, Governor Chubuike Amaechi of Rivers State later stated that contrary to the prevailing notion that the Governors’ support for the removal of fuel subsidy is hinged on their inability to pay the new minimum wage, they wanted it removed because only a few people were benefitting from the subsidies. He added that “with billions spent on fuel importation and we are not seeing the fuel, refineries are not in place … if we remove the subsidy, then people will establish refineries … the refineries will employ people and makefuel available (Social Action 2013).
The debate over subsidies was further fuelled on the 4 of October 2011 when President Goodluck Jonathan forwarded to the National Assembly [Senate and House of Representatives] the 2012-2015 Medium Term Expenditure Framework, and the 2012 Fiscal Strategy Paper. Among other issues, the documents proposed to phase out subsidy on fuel beginning in 2012. According to the President, this will make available about N1.2 trillion – some of which will be available for use in creating safety nets for the poor who will beadversely affected by the removal of the subsidy, and also go into the establishment of ‘critical infrastructure’.
Fuel subsidy removal, which the federal government has effectively canvassed and lobbied for since May 29, 2011 appear to finally take off on December 12, 2011. This is when the National Economic Council (NEC) headed by Vice President Namadi Sambo decided that the government should finally remove the subsidy from January 2012. By January 2012, there were revelations that amount expended on fuel subsidies in 2011 was much higher than what the government was keen to admit. While it has been estimated that government expenditure for this purpose was about N561 billion in 2010, the figure, at least, tripled in 2011 though there was no substantial increase in fuel consumption between the periods.
An interesting matter from the economy is the issue of fuel subsidy removal, which has been a great controversy for Nigerians. The issue of fuel subsidy removal has been on in Nigeria for some decades of which different governments have tried to implement the reform but were unsuccessful due to fierce public demonstration of disapproval. This has often led to mass protests by the citizens and the civil society who regard such policy as a measure to further subjugate and impoverish the masses. Notwithstanding, it seems that the longer the subsidies have existed, the more entrenched the opposition to reduce them. It is against this backdrop that this study investigates the effect of fuel subsidy removal on national development in Nigeria, with emphasis on the period between 1999 and 2012. To this end, it aims to determine if the incremental increases in the pump price of fuel undermine the living standard of Nigerians. More so, the study seeks to establish if the fuel subsidy probe has improved national revenue accounting. Finally, the research will determine if mass protests that accompany fuel price increases undermine the economic stability of Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Subsidy has been defined as aids directly granted by government to an individual or private commercial enterprise deemed beneficial to the public. It is also a grant or gift of money from a government to a private company, organization, or charity to help it function.
In relation to fuel in Nigeria, it means the financial aid granted to autonomous and foremost oil marketers by the government for them to supply their products at a cheaper rate for the good of the masses. This move is almost always aimed at boosting the economy of a country, providing social amenities for the people, stabilizing the market, creating employment opportunities and of course the assumption by the government that it is capable of fighting corruption. The Nigeria Extractive Industries Transparency Initiative (NEITI, 2011) notes that the issue of subsidy is not alien to the nation’s blood stream because it existed during the military regime when the four refineries of the nation could only produce little which could not even satisfy the domestic needs of the people.
Subsidy, in economic sense, exists when consumers of a given commodity are assisted by the government to pay less than the prevailing market price. In relation to fuel subsidy, it means that consumers would pay less than the pump price per litre of products. More so, fuel subsidy could be described as the difference between the actual market price of petroleum products per litre and what the final consumers pay for those same products. Indeed, developing countries have used petroleum products or fuel subsidies for consumers primarily as a means of achieving certain social, economic, and environmental objectives, as identified by Bazilian and Onyeji, (2012). These include alleviating energy poverty and improving equity, increasing domestic supply, national resource wealth redistribution, correction of externalities and controlling inflation. Subsidies were introduced in the Nigerian petroleum sector in the mid 1980’s.
Something of a creeping phenomenon, the value of the subsidies has gone from 1 billion Naira in the 1980s to an expected 6 billion Dollars in 2011. Nigeria is a country endowed with vast mineral resources prominent among which are the oil and gas reserves. The country possesses 28% of Africa’s proven oil reserves, second only to Libya; and is the largest producer of crude oil in the region, producing 2.4 million barrels per day in 2010 which is about 24% of the continent’s petroleum (Siddig, et al, 2013).
In addition, Nigeria has four refineries with an installed production capacity of 445,000 barrels of fuel per day, adequate to meet its domestic needs with a surplus for export (Explore, 2011). However, Nigeria is a large net importer of fuel and other petroleum products. In spite of efforts to revamp her economy via various reforms, which includes comprehensive non-oil export diversification initiatives, petroleum still contributes an average of 95% of the nation’s external earnings (Majekodunmi, 2013). The country increasingly relies on imported petroleum products because the existing refineries are producing below 20% of their installed capacity. In fact,the cost of importing petroleum products has risen so rapidly in recent years that the country’s capital expenditures and balance of payment are under threat (Adelabu, 2012).
According to Majekodunmi (2013), for five decades now, Nigeria’s economic growth and other related activities, (including living standards) have largely been influenced by the oil industry. The view that the economy is heavily dependent on the oil industry will amount to an understatement as the oil industry is nothing short of the life-blood of the Nigerianeconomy (Adelabu, 2012). The International Monetary Fund (IMF, 2013) indicates that Nigeria is the largest oil producing country in Africa and the sixth in the world. The country’s economic strength is derived largely from its oil and gas wealth, which contributes about 99 percent of government revenues and 38.8 percent of GDP (National Budget, 2010).
Despite these positive developments, successive governments in Nigeria have been unable to use the oil resources to significantly reduce poverty, provide basic social and economic services for her citizens (Ering and Akpan, 2012). Fuel subsidy was, before the coming of the Goodluck Jonathan’s administration, a policy of the federal government meant to assist the people of Nigeria to cushion the effects of economic hardship. However, the controversy over the removal of fuel subsidy was sparked off in June 2011 at the instance of Nigeria Governors’ Forum, which includes governors of the 36 federating states in Nigeria.
The Forum visited President Jonathan in the wake of the national debate over the payment of the new N18,000 minimum wage. The governors pleaded their inability to pay the new wage bill and suggested the removal of fuel ubsidy to ensure that more money accrues to the Federation Account, which will in turn be shared among the three tiers being federal, state and local governments. Nevertheless, the Chairman of the Forum, Governor Chubuike Amaechi of Rivers State later stated that contrary to the prevailing notion that the Governors’ support for the removal of fuel subsidy is hinged on their inability to pay the new minimum wage, they wanted it removed because only a few people were benefitting from the subsidies. He added that “with billions spent on fuel importation and we are not seeing the fuel, refineries are not in place … if we remove the subsidy, then people will establish refineries … the refineries will employ people and makefuel available (Social Action 2013).
The debate over subsidies was further fuelled on the 4 of October 2011 when President Goodluck Jonathan forwarded to the National Assembly [Senate and House of Representatives] the 2012-2015 Medium Term Expenditure Framework, and the 2012 Fiscal Strategy Paper. Among other issues, the documents proposed to phase out subsidy on fuel beginning in 2012. According to the President, this will make available about N1.2 trillion – some of which will be available for use in creating safety nets for the poor who will beadversely affected by the removal of the subsidy, and also go into the establishment of ‘critical infrastructure’.
Fuel subsidy removal, which the federal government has effectively canvassed and lobbied for since May 29, 2011 appear to finally take off on December 12, 2011. This is when the National Economic Council (NEC) headed by Vice President Namadi Sambo decided that the government should finally remove the subsidy from January 2012. By January 2012, there were revelations that amount expended on fuel subsidies in 2011 was much higher than what the government was keen to admit. While it has been estimated that government expenditure for this purpose was about N561 billion in 2010, the figure, at least, tripled in 2011 though there was no substantial increase in fuel consumption between the periods.
An interesting matter from the economy is the issue of fuel subsidy removal, which has been a great controversy for Nigerians. The issue of fuel subsidy removal has been on in Nigeria for some decades of which different governments have tried to implement the reform but were unsuccessful due to fierce public demonstration of disapproval. This has often led to mass protests by the citizens and the civil society who regard such policy as a measure to further subjugate and impoverish the masses. Notwithstanding, it seems that the longer the subsidies have existed, the more entrenched the opposition to reduce them. It is against this backdrop that this study investigates the effect of fuel subsidy removal on national development in Nigeria, with emphasis on the period between 1999 and 2012. To this end, it aims to determine if the incremental increases in the pump price of fuel undermine the living standard of Nigerians. More so, the study seeks to establish if the fuel subsidy probe has improved national revenue accounting. Finally, the research will determine if mass protests that accompany fuel price increases undermine the economic stability of Nigeria.
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