EFFECT OF FUEL SUBSIDY REMOVAL ON HOUSEHOLDS

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EFFECT OF FUEL SUBSIDY REMOVAL ON HOUSEHOLDS

CHAPTER ONE

BACKGROUND OF THE STUDY

1.1 INTRODUCTION

The unanticipated fuel subsidy removal seems like an illusion to Nigerians. Only the time the subsidy will go finally is the time nobody knows. The partial removal which was traumatic on the citizenry early January, 2012 as the New Year gift from the government was not the first removal of subsidy on fuel in Nigeria. The history of subsidy removal according to Ering and Akpan (2012) dates back to

1978 when the pump price of fuel which was then at 8.4 kobo per litre was reviewed upwards to 15.37 kobo per litre under the administration of Olusegun Obasanjo. His administration wanted to generate enough money to run the government particularly when it was preparing for the 1979 democratic elections and also to cater for the social needs of Nigerians. Midway into the second republic under

Sheu Shagari, specifically in 1982, the pump price was raised to 20 kobo per litre. In 1986, the military administration of General Ibrahim Babangida declared that due to the devaluation of the Naira, the domestic price of fuel had become unreasonably cheap and was therefore burdensome to the federal government’s purse. The price of petroleum products was thus raised from 20 kobo per litre through a negotiation process and was sold at 70 kobo per litre before stepping aside. All along, Babangida, Abacha, Shonekan, Abdulsalam and Obasanjo administrations carried out exercises on fuel subsidy removals. The fuel subsidy removal was carried out by Obasanjo eight times during his first and second coming. For his valedictory gift to Nigerians in 2007, Obasanjo raised the price of fuel per litre to N70, but the Yaradua’s regime later reviewed it downward to N65 on assumption of office in May 2007. Fuel subsidy removal was not carried out by the regimes of Buhari/Idiagbon and Umaru Shehu

Yar’Adua (Ering and Akpan (2012). The ill health of Ya’Ardua and Buhari’s dissipation of energy in combating corruption and indiscipline in the Nigerian society might have resulted on their not having anything to do with fuel subsidy removal.

When consultations and discussions were going on in respect of the removal of subsidy on fuel, the Petroleum Product Pricing Regulatory Agency (PPPRA) on January 1st, 2012 announced the outright removal of fuel subsidy and a litre of premium motor spirit (PMS) popularly called petrol was fixed at N141. This resulted in massive strike actions and protests by the Nigerian Labour Congress (NLC),

Trade Union Congress of Nigeria, Petroleum & Natural Gas Workers Senior Staff Association (PENGASAN), National Union of Petroleum and Gas Workers (NUPENG), Civil Society Organisations, Academic Staff Union of Universities (ASUU) and the generality of Nigerians. The mass social protests nearly transformed into the “Nigerian spring” like the social protests in Tunisia, Egypt and Libya that was named “Arab Spring”.

The government put forward various advantages that will come up when subsidy is fully removed on fuel. Subsidy removal will eliminate incentives for corruption and excessive profiteering by an unpatriotic cabal in the petroleum sub sector. It will also eliminate capital flight and build Nigeria’s foreign reserve in order to position the economy for speedy growth and global competitiveness. It will minimize borrowing and save money to invest in job creation, power and other infrastructural facilities.

These savings will be deployed into providing safety nets for all segments of the society which will help to ameliorate the effects of subsidy removal. Savings realized from the removal would be used to build more refineries and buy buses that will help cushion the effect of the removal. The protagonists also argued that subsidy removal will trigger private sector investment in a deregulated downstream petroleum sector and enthrone efficiency and catapult the development of agriculture which was formerly the main stay of the economy.

But the antagonists of the fuel removal did not support these views. They argued that the total amount that will be generated and the actual sharing have not been revealed by the federal government, therefore it was premature to speak of the benefits of subsidy removal. Fuel subsidy removal will automatically lead to increases in the pump price of fuel. Nigeria is among the world’s top 10 crude oil exporters, but it imports 80 percent of the fuel it needs, using a state subsidy scheme that loses billions of dollars to graft.

Nigeria has the highest pump price in all the oil producing nations. Algeria, Egypt, Venezuela and Saudi Arabia have their fuel price per litre as $0.41, $0.31, $0.023 and $0.16 respectively. Why should

Nigeria’s price per litre be $ 0.87 which is more than double the price of any of these oil producing nations? The comparison of the minimum wage is also taken into consideration. The N18,000 minimum wage is far below what are in operation in these nations. There is no need, they argue to further pauperize the citizenry by removing the subsidy when the country is being compared with other countries where the minimum wages are in hundreds of thousands of naira. Some believe that there is no subsidy but just a ruse being imposed on the masses by the government. There are refineries in the country and those in operation are working far below the installed capacity.

Is it not a paradox and waste of money to export the raw materials and the finished goods then imported into the country in the next couple of weeks? Members of the ruling class who are accused of having refineries outside the shores are bent in continuing the importation of the fuel. The government is then accused of insincerity by not disclosing the landed cost of the fuel being imported and the margin which is then added to it before determining the selling price.

A year after, no sign of any of the palliative measures promised by the president at the beginning of 2012 when the price was announced at N141 per litre is in place. In the 2103 budget which was named Fiscal

Consolidation with Inclusive Growth there was no mention of the palliative measures which are promised early in January, 2012.

These and other issues are the main focus of this paper in finding the justification or otherwise of the fuel subsidy removal, the politics surrounding it, the costing aspects and the recommendations towards a fulfilled and egalitarian society.

1.2 PROBLEM OF THE STUDY

The Nigerian economy over the years has been programmed to revolve around the supply of ‘cheap’ petroleum products. An average household in Nigeria depends on subsidized by-products of crude oil such as petrol and kerosene for domestic and commercial use. This dependence is not helped either as public electricity supply from PHCN is epileptic. Almost every home and business is powered by generators fired by subsidized petrol. The few small scale businesses such as Hotels, Barbers, Welders, Hair dressers, Pepper sellers, Cool-room owners, Food sellers, Private and Government hospitals etc all rely on subsidized fuel. Transportation costs for instance have gone up and this will result in spiral effect on other sectors- all other businesses in fact revolve around the transport sector. It is very obvious that subsidy removal will worsen the country’s already inflation rate. In fact it will result in hyper inflation as prices of goods and services are bound to skyrocket beyond the reach of many. Even the Naira will not be spared, because it will further depreciate in value as much money will be chasing fewer goods. Creditors also lose during inflation because if they lend out money when there is no inflation and the prices are moderate or stable, the moment inflation sets in the value of that money to the creditor is lost (Louis Iba, 2012).

1.3 OBJECTIVES OF THE STUDY

Improve the knowledge of all relevant stakeholders in understanding the social and economic implications of the removal of subsidy as well as the implications of maintaining the subsidy;
Improve the understanding of all relevant stakeholders with regards the social and economic effects of proposed government plans to offset the ramifications of the removal of the subsidy;
Examine best practice for dealing with petroleum subsidy in other countries and in particular in emerging households;
Improve the quality of dialogue and debate around the issue of the removal of fuel subsidy by providing an easily digestible factsheet summarizing the facts and figures in favour and against the removal of the subsidy;

1.4 RESEARCH QUESTION

Can this study improve the knowledge of all relevant stakeholders in understanding the social and economic implications of the removal of subsidy as well as the implications of maintaining the subsidy?
Are there ways to examine the best practice for dealing with petroleum subsidy in other countries and in particular in emerging households?
How do we improve the quality of dialogue and debate around the issue of the removal of fuel subsidy by providing an easily digestible factsheet summarizing the facts and figures in favour and against the removal of the subsidy?

1.5 RESEARCH HYPOTHESIS

HO₁: This study cannot improve the knowledge of all relevant stakeholders in understanding the social and economic implications of the removal of subsidy as well as the implications of maintaining subsidy.

HI₁: This study can improve the knowledge of all relevant stakeholders in understanding the social and economic implications of the removal of subsidy as well as the implications of maintaining subsidy.

HO₂: There are no ways to examine the best practice for dealing with petroleum subsidy in other countries and in particular in emerging households.

H1₂: There are ways to examine the best practice for dealing with petroleum subsidy in other countries and in particular in emerging households.

HO₃: This study cannot improve the quality of dialogue and debate around the issue of the removal of fuel subsidy by providing an easily digestible factsheet summarizing the facts and figures in favour and against the removal of the subsidy.

H1₃: This study can improve the quality of dialogue and debate around the issue of the removal of fuel subsidy by providing an easily digestible factsheet summarizing the facts and figures in favour and against the removal of the subsidy.

1.6 SCOPE OF THE STUDY

The researchers limited this work to the effect of fuel subsidy removal on households.

LIMITATION OF THE STUDY

The study of this nature cannot be carried out without difficulties in the process. One of the major limitations encountered in this work is the scarcity of data and material; another is the problem of finance. A study of this nature would require a lot of financial commitment in the area of the researcher moving around and also in the area of the questionnaire distribution.

1.8 DEFINITION OF TERMS

Fuels: are any materials that store potential energy in forms that can be practicably released and used for work or as heat energy. The concept originally applied solely to those materials storing energy in the form of chemical energy that could be released through combustion,^[1] but the concept has since been also applied to other sources of heat energy such as nuclear energy.

Subsidy: A subsidy is a form of financial or in kind support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.^[1] Although commonly extended from Government, the term subsidy can relate to any type of support – for example from NGOs or implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates).

Households: A household consists of one or more people who live in the same dwelling and also share at meals or living accommodation, and may consist of a single family or some other grouping of people.

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