Fuel subsidy is more than economics

Nigeria has long subsidised fuel for its citizens. The cost of the subsidy is high, and economists and the international financial institutions have argued for many years that it significantly distorts the economy. Since the establishment of civilian government in 1999, consecutive presidents have sought to reduce or eliminate the subsidy. But such efforts have been scaled back or abandoned because of deep popular opposition. On occasion, proposals for curtailing the subsidy have led to strikes and serious riots in urban areas, such as Lagos.In the budget for the coming year, President Goodluck Jonathan has left out the fuel subsidythereby abolishing it. Predictably, the House of Representatives has demanded that the subsidy be returned to the budget. In the senate, some members are arguing that the budget is too high for the military and security services. The implication seems to be that if it were reduced, money might be found to continue to subsidise fuel. In any event, the debate is not yet over.With Boko Haram in the North, the prospect of renewed militant activity in the Delta, and lack of security in Plateau state, why has the government decided to tackle a reform as difficult and contentious as the fuel subsidy now' The answer appears to be the prospect that the government could be short of money. Jonathan said that the fuel subsidy cost the government N1.2 trillion this year.Eliminating or reducing the fuel subsidywhich covers kerosene as well as gas and oilwould have a ripple effect throughout the entire economy. Prices for a wide range of goods beyond fuel would likely increase. Outside Lagos and Abuja most of the population is impoverished, and reduction or elimination of the subsidy will have serious consequences for those individuals. Further, there is a moral dimension. The fuel subsidy is the principal way ordinary Nigerians benefit from the countrys oil wealth. The Roman Catholic archbishop of Abuja and former head of the Christian Association of Nigeria observes that the subsidy is a tiny resource transfer to the Nigerian people, who otherwise receive little or nothing from the current political economy. It is, therefore, morally justified, no matter what the World Bank says. (Notably, the most recent statement from the World Bank says that Nigeria should focus on fuel supply, not necessarily the fuel subsidy.)Given such considerations, it is likely that the Nigerian federal government will seek to reduce, rather than eliminate, the fuel subsidy. If it does so, the challenge will be find a point that helps the governments bottom line without driving people into the streets.- Culled from Council for Foreign Relations.- Michael Levi, Senior Fellow for Energy and the Environment, The Council for Foreign Relations.
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