Removal of Subsidies is not a Destination but a necessary Requirement to Staying Afloat

The recent decision by the government to remove subsidies on fuel and electricity has sparked a lot of debate and criticism from various quarters. Some have argued that this is a betrayal of the masses, who are already suffering from the effects of inflation, unemployment and insecurity. Others have claimed that this is a ploy to enrich the elites, who are the main beneficiaries of the subsidies. However, I will try to explain why the removal of subsidies is not a destination but a necessary requirement to staying afloat in the current economic situation in Nigeria.

First of all, let us examine what subsidies are and how they work. Subsidies are financial support given by the government to reduce the cost of production or consumption of certain goods or services. In Nigeria, the government has been subsidizing fuel and electricity for decades, meaning that consumers pay less than the actual market price for these commodities. The difference between the market price and the subsidized price is borne by the government, which uses public funds to pay the suppliers.

The main rationale for subsidizing fuel and electricity is to make them affordable and accessible to the majority of Nigerians, especially the poor and vulnerable. However, this noble intention has been undermined by several factors, such as corruption, inefficiency, smuggling and vandalism. According to various reports, Nigeria spends about N1 trillion annually on fuel subsidy alone, which is equivalent to about 3% of its GDP. This is a huge amount of money that could be used for other developmental purposes, such as health, education and infrastructure.

Moreover, fuel subsidy has not really benefited the poor as intended. According to a 2019 report by the World Bank, only 15% of fuel subsidy benefits go to the poorest 20% of Nigerians, while 69% go to the richest 20%. This is because the poor consume less fuel than the rich, who own more cars and generators. In fact, fuel subsidy has encouraged wasteful consumption and increased environmental pollution. It has also created an artificial demand for fuel, which exceeds the domestic supply capacity. As a result, Nigeria has to import most of its fuel needs, despite being an oil-producing country.

Similarly, electricity subsidy has not improved the quality and quantity of power supply in Nigeria. According to a 2020 report by the Nigerian Electricity Regulatory Commission (NERC), Nigeria has an installed generation capacity of about 13,000 megawatts (MW), but only about 4,500 MW is available on average. This is far below the estimated demand of about 25,000 MW. The low availability of power is due to several factors, such as gas shortages, transmission constraints, distribution losses and vandalism.

Electricity subsidy has also distorted the market signals and incentives for investment in the power sector. According to NERC, the average tariff paid by consumers in Nigeria is about N32 per kilowatt-hour (kWh), while the actual cost-reflective tariff is about N51 per kWh. This means that the government pays about N19 per kWh as subsidy to cover the gap between the tariff and the cost. This amounts to about N540 billion annually, which is equivalent to about 1.5% of GDP.

However, this subsidy has not translated into improved service delivery or customer satisfaction. According to a 2019 survey by NOI Polls, only 36% of Nigerians are satisfied with their electricity supply, while 64% are dissatisfied. The main reasons for dissatisfaction are frequent power outages, high bills and poor customer service. In fact, many Nigerians resort to self-generation using diesel or petrol generators, which are more expensive and harmful to the environment.

Therefore, it is clear that subsidies on fuel and electricity are not sustainable or effective in achieving their intended objectives. They are draining public resources that could be used for more productive purposes. They are also creating distortions and inefficiencies in the market that discourage investment and innovation. They are also benefiting the rich more than the poor, who still lack access to affordable and reliable energy services.

This is why the removal of subsidies is not a destination but a necessary requirement to staying afloat in these challenging times. By removing subsidies, the government will save money that can be used to fund other social programs that directly target the poor and vulnerable segments of society. For instance, the government has introduced a National Social Investment Program (NSIP), which includes conditional cash transfers, school feeding program, youth empowerment scheme and microcredit scheme.

By removing subsidies, the government will also create a level playing field for private sector participation and competition in the energy sector. This will encourage more investment in infrastructure and technology that will increase supply and reduce cost in the long run. It will also promote efficiency and accountability in service delivery and customer relations. It will also foster innovation and diversification in energy sources that will reduce dependence on fossil fuels and enhance environmental sustainability.

Of course, removing subsidies will have some short-term negative impacts on consumers, especially those with low income and high energy consumption. The prices of fuel and electricity will increase, which will affect the cost of transportation, production and living. This will also have a ripple effect on the prices of other goods and services, which will increase inflation and reduce purchasing power.

However, these impacts can be mitigated by implementing some complementary measures, such as: Providing targeted subsidies or vouchers to the poor and vulnerable groups that need them the most, such as transporters, farmers, artisans and small businesses.

Providing palliatives or stimulus packages to cushion the effects of the price increases, such as tax relief, minimum wage adjustment, social security and unemployment benefits.

Providing alternative or renewable energy sources that are cheaper and cleaner, such as solar, wind, hydro and biomass.

Providing energy efficiency and conservation measures that will reduce energy demand and wastage, such as smart meters, LED bulbs, energy audits and awareness campaigns.

Providing regulatory and institutional reforms that will ensure transparency, accountability and fairness in the energy sector, such as metering, billing, collection and dispute resolution.

Removing subsidies on fuel and electricity is not a destination but a necessary requirement to staying afloat in the current economic situation. It is a painful but inevitable decision that will have long-term benefits for the economy and society. It is also a shared responsibility that requires the cooperation and sacrifice of all stakeholders, including the government, private sector, civil society and consumers. Together, we can overcome this challenge and build a more prosperous and sustainable future for ourselves and generations to come.