SIP

• These include rising cost of living which is reflected in double-digit inflation, stagnant wages, non-payment or the late payment of salaries, a cash crunch and fuel scarcity.
• It is expected that President-elect Bola Ahmed Tinubu will jettison Nigeria’s fuel subsidy, which is estimated to cost the Nigerian treasury about US$10 billion annually.
• In recent years the World Bank has been urging Nigeria to remove the fuel subsidy.
• There are concerns that the removal of the subsidy will impose even further hardships on Nigerians by raising fuel and transportation costs.
• The fuel subsidy should be discontinued, and a significant portion of the savings distributed to low-income Nigerians.

Three reasons why subsidies are bad

• Over-consumption: Setting fuel price below market price encourages over-consumption, with no significant linkage effects on other sectors of the economy.
• Linkages are usually created when the consumption of a good or service results in the emergence of new economic activities.
• The global trend is to discourage fuel consumption by making it more expensive through higher sales taxes.
• With an abysmally low minimum wage of N30,000 per month and non-availability of car loans, most Nigerian workers cannot afford a car.

Solutions

• These are described by the United Nations Conference on Trade and Development as:
  the productive resources, entrepreneurial capabilities and production linkages that together determine a country’s ability to produce goods and services that will help it grow and develop.
• the productive resources, entrepreneurial capabilities and production linkages that together determine a country’s ability to produce goods and services that will help it grow and develop.
• This practice is partly responsible for the perennial fuel scarcity in Nigeria.
• Cash transfers: Savings from scrapping the fuel subsidy could be used to augment Nigeria’s Conditional Cash Transfers programme.
• The inflationary impact of cash transfers from fuel subsidy savings will be minimal, since new money is not created in the economy.
• The harsh reality is that fuel subsidies benefit mainly upper class households, who consume most of the fuel in Nigeria.

Conclusion

At first blush, one might think it’s politically risky for the Bola Tinubu administration to start on the rocky foundation of scrapping Nigeria’s fuel subsidy. But fixing difficult and politically unpopular economic problems is a hallmark of effective leadership. If implemented properly, fuel subsidy removal may be an important legacy of the Tinubu administration, one that will differentiate him from past administrations.