AACS Fortnightly
(Mondays)
8th May 2023

From the Chairman’s Desk,

Setting The Economic Agenda Series – FUEL SUBSIDY

At AACS, the second critical of the six items on the economic setting agenda is the Fuel Subsidy.

The fuel subsidy is a huge white elephant project and a drain on the nation’s lean revenue, with about $10b spent last year and $7.5b budgeted this fiscal year till mid-2023. As much as a subsidy targeted towards vulnerable citizens may be desirable, a significant chunk of it is misappropriated. The figures for the required consumption are uncertain and clearly bogus, depending on who you speak to, it ranges from 50m to 66m litres daily. The need to stop this drain is not greater than the reality that we cannot afford it. The root cause of fuel importation and subsidy in the midst of one of the largest crude reserves in the world is the absence of local refineries and poor power infrastructure that drives the need for using the product to augment household and small business power needs. However, AACS reiterates that we have not seen the plans on ground to show preparedness for life when the subsidy is removed.

Oil was discovered in Nigeria in 1953, and the nation has grown to become a top global producer. The first oil crisis in 1973 was caused by the embargo proclaimed by King Faisal of Saudi Arabia during the Yom Kippur War, and it led to a price increase of nearly 300%. In response, Nigeria introduced fuel subsidies to stabilise the price for its citizenry. However, this is now an endemic that has plagued several administrations, drilling a hole in resources that could be diverted to more inclusive growth programs.

AACS believes in medium-term innovations and investments in refinery and power generation. The use of modular refineries like Waltersmith Refinery is a good option, as these are significantly less capital-intensive. Private investments like Dangote’s multi-billion dollar refinery with a capacity of 650,000 barrels per day should be supported with varying incentives to drive the sector. It is essential that it’s private sector-led. The first tranche of $800m from the World Bank must not be shared with citizens via any register as proposed, but must go into infrastructure to manage the effects of the subsidy removal. Targeted improvements in mass transportation, goods & produce supply chain networks across the country are essential. Local consumption is likely to reduce drastically when the subsidy is removed, as the incentive to smuggle products out of the country will be wiped off.

The ideas are not exhaustive, but we must predicate the removal on a clear immediate, mid and long-term strategy. The jury is out on the possibility of the Dangote refinery scheduled to be commissioned on the 22nd of this month being a silver bullet, but the judgement of sustaining the subsidy regime is an emphatic no.

Falil Ayo Abina

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