Last year petroleum subsidy in Nigeria cost the federal government $4 billion. According to the finance minister that amount equals 60% of total government capital expenditure. This year it will probably cost the government more to maintain oil subsidy.
What is a subsidy?
A subsidy is a form of assistance given by government to a business or economic sector. In Nigeria’s case it is utilized for price support – to keep the price of petroleum products at a particular level to benefit the public.
How does it affect the Nigerian economy?
In Nigeria’s case petroleum subsidy means that the price of petroleum products is not set by market forces. It is probably lower than the market price. What this does is increase the demand/consumption because prices are lower than the market or actual price for the product. It reduces supply/production because no producer will supply any product when it is lower than the market price. Any product that is valued cheaper than the actual price kills the incentive for any producer to move in. Because subsidy cause excessive demand and a reduction in supply the Nigerian government pays for the difference.
What does the contraction in supply mean for Nigeria?
Since subsidies means that petroleum products are cheaper or are not sold at the market rate, it discourages producers who are motivated by profit. This is why no new refineries and oil infrastructure has been built in Nigeria in the last 20 years. It is also important to state that the downstream oil sector will not see any new investment local or foreign if the federal government doesn’t deregulate. Also oil infrastructure like refineries and pipelines will continue to decay and no new ones will be built.
What will derelegulation do for Nigeria?
It will open up this sector (through new investment) to competition. When competitive forces are unleashed it will cause efficient resource allocation which will eventually drive down the price of fuel in Nigeria. I have to mention here that prices will go up at least for a period of six month after the subsidy is removed because the market has to adjust to the entry of new producers to the market. In the end the consumer wins.
Nay Sayers and people who do no understand how markets work will doubt this. But the petroleum sector of the Nigerian economy right now can be compared to what telecoms in Nigeria looked like before the market was opened up. There was only one carrier NITEL which was government owned. It was a monopoly, there was no competition and service was poor. Very few people owned a telephone and it was very expensive. Also because telephone is an infrastructure crucial to economic growth the Nigerian economy also suffered in those years. Any observer of the telecom sector in Nigeria will notice that the advent of GSM in 2002 has fueled economic growth. The deregulation of the oil sector will also have a similar but larger effect (oil is a major input in manufacturing) on the economy.
The Egyptian government carried out similar reforms around 2004 and their growth rate increased from about 4% in the same year to about 7% two years later.
The $4 billion dollars which is being lost to corruption and waste due to a subsidy that does not work can be ploughed back to other sectors of the economy like infrastructure where it is sorely needed.
Re- Why Nigeria needs to deregulate
I am amazed at the self-righteous posture of this writer. For one, you tend to assume you know more by saying those saying no to your thinking do not know how market forces work. You have just displayed on e of the marks of intellectual emptiness. Also, you talked about deregulation so glowingly that you did not remember to tell us about its disadvantages; may be you thought it has none. I may not be surprised if you are one of those Western trained people who do not study the context before making recommendation. If Nigeria is losing over 4billion naira every year due to subsidy, so what. What is the essence of a gain that will not improve the lives of the people. The comparison you made with telephone obviously confirm to me that you know close to nothing about the poverty level in Nigeria and you are thinking only of the figures. Any good social scientist will tell you that life in not only measured in figures as some Western economists are wont to do. That is the more reason why over 60 years of IMF/World Bank economic policies have brought nothing but misery to the African continent. For your information, it is even better that this your so-called profit be on subsidy that will help the poor Nigerians than for one stupid politician to pack all the money and stack it abroad. If you care, go to the remote parts of the country and see how people are suffering on transportation, despite your deregulation, I am not sure you want to add to their misery. What percentage of Nigeria population is involved in telephoning and what percentage is interested in transportation and other fuel related items. This should give you an idea of what we are talking about. In addition, the competition you are talking about is such that the foreigners will come and bribe the Nigerian officials to have their ways and eventually get trade advantage over the local producers. So, are we arguing that we want to continue to work for foreigners at our expense. i am sure you are one of the supporters of globalisation and the so-called free trade, with its resultant. Please just spare us those your foreign economic sense and let us grapple with our conditions here.
DEREGULATION
This is a good piece. when will things change in 9ja? selfishnes is the root of our problems. why knt the deregulation start? why is it takin long? some people are enjoyin from the subsidy that isnt workin. they are jst using the failed system 2 foot dia bills. i weep for 9ja and pray 4 change.
Patience Abdon