Nigeria Ends Oil Subsidy to Invest Savings in Infrastructure Development

The new administration maintains that ending the subsidy will aid climate action and fund transportation and energy investments

Without the subsidy, Nigeria could conserve more than 15 million tonnes of CO2 each year.

“The fuel subsidy is gone,” said Nigeria President Bola Tinubu, in his inaugural address on 29 May 2023. “The subsidy can no longer justify its ever-increasing costs in the wake of drying resources. We shall instead rechannel the funds into better investment in public infrastructure, education, health care and jobs that will materially improve the lives of millions.”

The president’s pronouncement prompted a spike in the pump price of petrol from about ₦780 a gallon (approximately $1) to ₦2160 a gallon ($2.80), driving up the overall cost of living in the country.

Organized labour threatened a nationwide strike if the government failed to reverse itself as former president Goodluck Jonathan did in 2012, when he tried to end subsidies. But after negotiations with the Tinubu administration, the unions reneged on their threat.

A spotlight on subsidies

Before President Tinubu’s inauguration, the Nigerian government spent ₦400 billion (about $500 million) monthly to subsidize petroleum imports, according to Mele Kyari, chief executive officer of the Nigerian National Petroleum Company Limited (NNPCL), licensed to operate in Nigeria’s oil industry.

The subsidy was the difference between the projected open market price and the pump price. To make up for the market shortfall, the government issued it as a direct or indirect payment to individuals or companies that imported refined products.

In 2022, Nigeria’s House of Representatives set up a panel to investigate its petroleum subsidy regime from 2017-2022. The government has yet to publish the panel’s findings, submitted in June 2023, but it has maintained that the subsidies benefitted a few companies.

According to Femi Falana, a Senior Advocate of Nigeria and one of the country’s renowned constitutional and human rights lawyers, the subsidies diverted huge sums of public funds to private pockets.

“This is one decision we must bear to save our country from going under and take our resources away from the stranglehold of a few unpatriotic elements,” President Tinubu reiterated in his Democracy Day address on 12 June.

“This [subsidy removal] is one decision we must bear to save our country from going under and take our resources away from the stranglehold of a few unpatriotic elements.”

Mr. Tinubu is confident that ending subsidy payments will free up resources for massive infrastructure investments in transportation, energy and other sectors.

Unintended consequences

By the early 1990s, Nigeria’s four state-owned but independently operated oil refineries could not keep up with demand. The country began exporting the crude oil that its old refineries could not handle and then import the refined petroleum at a huge cost, which the government subsidized.

In 2000, the government approved about 20 licenses to private sector players for building new refineries in the country, yet they built none.

Why? Economists believe that those licensees chose not to build because the subsidies–in effect, price controls–might have prevented them from recouping their investment. As a case in point, the government’s own revenues dwindled under record-low oil prices.

In recent years, the government has had to rely on the NNPC to foot the subsidy payments, Mr. Kyari stated in an interview. As a result, the NNPC cannot fulfill its mandated contributions to the federation account, which serves as a shared revenue pool distributed among Nigeria’s federal, state and local levels of government.