IMPLICATIONS OF FUEL SUBSIDY REMOVAL CRISIS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The removal of fuel subsidies in Nigeria has been a subject of considerable controversy and debate, with far-reaching implications for the nation's economy, society, and political stability. Fuel subsidy refers to a governmental policy that involves providing customers with a reduction in the market price of fossil fuel, resulting in their paying less than the prevailing market rate for fuel (Ovaga and Okechukwu, 2022). When subsidies are implemented, customers are able to purchase petroleum products at a price per litre that is lower than the prevailing market price. There are ongoing global discussions around the issue of fuel subsidies, mostly due to their substantial financial magnitude and their impact on both the well-being of residents and the economic stability of nations. According to the International Energy Agency, the predicted worldwide fossil fuel subsidy has seen significant growth, reaching $1 trillion in 2022 from $325 billion in 2018. The aforementioned quantity surpasses the expected value of worldwide assistance, which stood at $204 billion in 2022, and exceeds the collective government income of poor nations.

On the other hand, there is a growing demand to eliminate worldwide subsidies for fossil fuels in order to redirect the resulting savings towards providing humanitarian aid to impoverished and vulnerable populations in developing nations (Couharde and Mouhoud, 2020; Ozili and Ozen, 2021). The controversial nature of removing fossil fuel subsidies arises from the idea that such subsidies may be seen as a sort of assistance, since they contribute to the affordability of fuel for those with little financial resources. In contrast to the aforementioned argument, a substantial body of literature has extensively documented the adverse outcomes associated with fuel subsidies. These include the escalation of air pollution and greenhouse gas emissions (Sweeney, 2020), the exacerbation of road congestion (McCulloch, Moerenhout, & Yang, 2021), the occurrence of road accidents and premature fatalities (Parry, Black, & Vernon, 2021), the loss of potential tax revenue (Sweeney, 2020), and the perpetuation of socioeconomic Nevertheless, policymakers in numerous nations exhibit hesitancy towards eliminating fuel subsidies and enacting reforms due to the potential repercussions, such as a substantial escalation in fuel or electricity costs. This outcome could potentially impose economic burdens on individuals with low incomes and those living in poverty.

Furthermore, the removal of fuel subsidymay incite widespread protests, heightening the likelihood of a revolution or the overthrow of the current governing body. Fuel subsidies were first implemented in Nigeria during the 1970s in response to the oil price shock experienced in 1973. In 1986, a partial removal of fuel subsidies took place. Subsequently, the gasoline subsidies have been implemented. In the year 2012, the government implemented a sudden removal of gasoline subsidies. The elimination of the gasoline subsidy resulted in widespread demonstrations, with the primary objective of urging the government to restore the subsidy that had been rescinded. As a result of widespread demonstrations, the administration made the decision to resume the gasoline subsidy in 2012. Subsequently, the disbursement of gasoline subsidies in Nigeria has seen a significant expansion. In the year 2022, the gasoline subsidy reached a total of ₦4 trillion (equivalent to US$6.088 billion), constituting almost 23 percent of the national budget amounting to ₦17.126 trillion (equivalent to US$25.87 billion) in the same year. Consequently, Nigeria found itself unable to maintain the gasoline subsidy by 2023, prompting the government to declare the elimination of such subsidy in June of that year. The existing body of research in Nigeria presents a range of outcomes on the impact of gasoline subsidies. Several research have examined the advantages of gasoline subsidies and emphasize the need of transparent administration in their implementation.

Conversely, some studies have shed light on the adverse effects of fuel subsidies and their implication. Omitogun et al (2021) demonstrate that the removal of fuel subsidies has the potential to decrease carbon emissions within the Nigerian economy. Also, Adekunle and Oseni (2021) suggest that the removal of fuel subsidies has the potential to mitigate the increase in carbon emissions by promoting energy conservation practices, notwithstanding the potential consequence of elevated energy costs. According to Asare et al. (2020), there is a case to be made for the removal of fuel subsidies. They contend that the revenue generated from this removal could be utilised by the government to implement prompt interventions in response to the COVID-19 crisis.

Additionally, this revenue could be redirected towards more productive expenditures that would contribute to long-term recovery and resilience in the post-COVID period (Ozili and Arun, 2023). Several studies have focused on the implications of eliminating gasoline subsidies. According to Umeji and Eleanya (2021), the authors contend that despite the implementation of fuel subsidy in Nigeria, the country's oil wealth has not resulted in an enhanced quality of life for its citizens. They further assert that the elimination of fuel subsidy could potentially lead to significant repercussions, which can be alleviated through governmental transparency in allocating the funds saved from the removal of fuel subsidy towards infrastructural advancements. According to Ovaga and Okechukwu (2022), the presence of fuel subsidies in Nigeria fosters a culture of corruption. This is primarily attributed to a faction of individuals who actively obstruct the operations of established refineries and impede the establishment of new ones. Their actions are driven by the intention to perpetuate fuel imports and maintain the continuation of fuel subsidies, ultimately serving their personal interests. According to Omotosho (2020), the elimination of gasoline subsidies in Nigeria has the potential to result in increased macroeconomic instability due to the subsequent escalation of energy costs and inflation. Moreover, the research conducted by McCulloch, Moerenhout, and Yang (2021) demonstrates that a significant portion of the Nigerian population expresses resistance towards the elimination or modification of gasoline subsidies. This opposition stems from the perception that the government is plagued by corruption and has the necessary competence to implement transparent changes.

Despite the presence of data in the existing literature, there seems to be a dearth of scholarly discourse about the ramifications of the recent fuel extraction activities undertaken in Nigeria during the year 2023. The absence of preliminary palliative measures prior to the elimination of the gasoline subsidy has sparked a contentious debate over the potential ramifications of this policy change on both the Nigerian economy and its citizens. Hence, it is important to ascertain and comprehend the macroeconomic and micro-economic ramifications associated with the elimination of fuel subsidies in Nigeria in 2023. It is in the light of these that the study seeks to the assess the implications of fuel subsidy removal crisis in Nigeria.

1.2   Statement of the problem

The removal of fuel subsidies results in an immediate and substantial increase in fuel prices. This can lead to rising inflation, increased cost of living, and a reduction in the purchasing power of the average Nigerian citizen.  Both the residential and commercial needs of the average Nigerian household are met by the use of subsidized by-products of crude oil, such as gasoline and kerosene. However, the inconsistency and unreliability of the public energy supply provided by the Power Holding Company of Nigeria (PHCN) is another factor that makes it more difficult to rely on this source of energy (Ozili & Arun, 2023). There has been several attempts by previous governments in Nigeria to eliminate the country's fuel subsidy but all were met with demonstrations and fierce opposition. Despite the potential advantages of removing fuel subsidies as articulated by the Nigerian President, the removal of these subsidies has led to an increase in the prices of food items due to the elevated fuel prices, which directly impacts agricultural productivity.

In addition, the removal of fuel subsidies is expected to result in the following consequences: a decline in economic growth, an upsurge in inflation, an increase in poverty rates, heightened fuel smuggling, a rise in criminal activities, an escalation in the cost of petroleum products, and a loss of jobs in both the informal sector and overall output. It is foreseen that greater market competition will ultimately lead to a reduction in gasoline prices. Nevertheless, in the immediate future, the general population faces challenges in adapting to the impending introduction of market competition. It is apparent that the current government has completely removed fuel subsidies without providing efficient infrastructure or alternative energy sources that could alleviate the transition and improve the overall quality of life.. Therefore this study seeks to assess the implications of fuel subsidy removal crisis in Nigeria.

1.3       Objectives of the study

The general objective of the study is to assess the implications of fuel subsidy removal crisis in Nigeria. The specific objectives is as follows:

1. examine the implication  of fuel subsidy removal on unemployment in Nigeria.

2. assess the impact of fuel subsidy removal on  inflation and food security.

3. analyze the impact of the fuel subsidy removal crisis on income level and standard of living in Nigeria.

1.4   Research questions

The following questions will guide the study:

1.        What is the implication  of fuel subsidy removal on unemployment in Nigeria?

2.        What is the impact of fuel subsidy removal on  inflation and food security?

3.        What is the impact of the fuel subsidy removal crisis on income level and standard of living in Nigeria?

1.5   Significance of the study

The implications of fuel subsidy removal crisis in Nigeria will be revealed to the government at various levels and citizens of Nigeria as needs to put up measures that will cushion the effect of fuel subsidy on rural dwellers.

Additionally, subsequent researchers will use it as a literature review. This means that other students who may decide to conduct studies in this area will have the opportunity to use this study as available literature that can be subjected to critical review. Invariably, the result of the study contributes immensely to the body of academic knowledge with regard to the implications of fuel subsidy removal crisis in Nigeria.

1.3   Scope of the study

The scope of this study is boarded on  the implications of fuel subsidy removal crisis in Nigeria. Theoretically, this study will discuss and examine the implication  of fuel subsidy removal on unemployment in Nigeria, assess the impact of fuel subsidy  removal on  inflation and food security and analyze the impact of the fuel subsidy removal crisis on income level and standard of living in Nigeria.

Geographically, the study will be delimited to people in Ikotun local government, Lagos state, Nigeria.

1.8 Limitation of the study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents.

In addition, there was the element of researcher bias. Here, the researcher possessed some biases that may have been reflected in the way the data was collected, the type of people interviewed or sampled, and how the data gathered was interpreted thereafter. The potential for all this to influence the findings and conclusions could not be downplayed.

More so, the findings of this study are limited to the sample population in the study area, hence they may not be suitable for use in comparison to other schools, local governments, states, and other countries in the world.

1.9       Definition of terms

Fuel Subsidy: government effort in paying for the difference between the pump.

Crisis:

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