THE EFFECT OF OIL SUBSIDY ON THE WELFARE OF NIGERIANS

CHAPTER ONE

INTRODUCTION

This chapter states the effects of oil subsidy removal and how this affects  the general well being of the ordinary Nigerian. 

 

1.1       BACKGROUND TO THE STUDY

According to Oxford Dictionary of economics, subsidy is a payment by the government  to consumers or producers which makes the factor cost received by producers greater than the market price charged by producers. It is a financial aid granted by a government to individuals or groups; usually in the form of cash payment to an industry or tax reduction so that price of commodity or a service may remain low for reasons of public welfare. Governments grant subsidy to supplement citizens income, influence the cost and supply of some vital commodities to make price competitive, to remove some type of burden and to gain political will. Subsidy can also be an interventionist programme which aim at reducing the negative effect of market competition as put forth by the United Nation (2001), that “government intervention which may involve the use of subsidy, is intended to remedy such market failure either by addressing their causes or by trying to replicate the outcome of a perfect market”. Hence, social consideration such as concern for the poor, the sick and the disadvantaged may also provide a rationale for subsidizing fuel. 

Nigerian government like other countries of the world is not an exception in ensuring the provision of such social safety nets. Over the years, it has used N3.0 trillion on fuel subsidy between 2009 and 2011 to provide for social and economic welfare. (Business Day Nigeria, 2012). This amount can be compared with the combined Federal Government budget deficit for the same period which was approximately N3.3 trillion. In 2011 alone, the amount spent on fuel subsidy was over N1.3 trillion which was greater than what was allocated to agriculture, infrastructure, education, and health(Business Day Nigeria, 2012). Among the products produced in the oil sector, premium motor spirit is the most consumed by Nigerians due to its significance in car use; with various fuel subsidy debate, this product price is usually more affected in terms of increase in its price. The increase in the product price usually affect consumer welfare due to its effect on transportation and consequently increase in price of other products that are associated with premium motor spirit, which includes kerosene,wax,bitumen e.t.c. Premium motor spirit is one major product that  have received much attention on the debate on oil subsidy removal.

The recent subsidy removal on Premium Motor Spirit (PMS), by the Nigeria’s government seems to contradict its role in the promotion of its citizen’s wellbeing. Even though, government removed the subsidy with the intention of promoting investment and output in the oil and other real sector of the economy. On the other hand, the members of the public are not clear about its relative effect on the different socio-economic groups. This is because fuel is strategic to input-cost which can easily diffuse into the selling prices of most firms and businesses. Critical as fuel is to economic development, care must be taken to achieve the desired result; otherwise, nominal prices will have a serious knock-on effect on the total welfare of the Nigerian citizens. For instance, in year 2001, Nigeria had spent over one billion and five hundred million(N1,500,000,000.00) to subsidize fuel while in 2002, the amount spent on subsidy was  twenty eight billion, three hundred and four million, eight hundred and ninety five thousand, eight  hundred and eighty five naira and sixty kobo(N28,304,895,885.60.) Similarly, the amount of subsidy spent in 2003 amounted to thirty four billion, three hundred and eighty three million, two hundred and six thousand one hundred and sixty four naira with a percentage change of 21%(N34,383,206,164) and subsequently fifty one billion, eighthundred and six million, five hundred and forty four thousand, five hundred and seventeen naira and  forty four kobo(N51,806,544,517.44).  With a percentage change of 51% in 2004, Eighty six billion, two hundred and twenty eight million, two hundred and sixty two thousand, eight hundred and fourteen thousand and seventy seven    kobo (N86,228,262,814.77) in 2005 with a percentage change of 66%, one hundred and nineteen billion, seven hundred and six one million, four hundred and ninety two thousand, two hundred and forty six  naira (N119,761,492,246.00) with a percentage change of 83% in 2006, in 2007,two hundred and sixty one billion, one hundred and five million, three thousand, five hundred and fifty nine naira (N261,105,003,559) with a percentage change of 118% in 2008, six hundred and thirty billion, five hundred and seventy million, nine hundred and twenty three thousand, four hundred and seven naira and forty six kobo (N630,570,923,407.46). With a percentage change of142% in 2009, six hundred and seventy three billion, seven million, eighty two thousand, one hundred and eighty two naira and fifty four kobo N673,007,082,182.54). with a percentage change of 6.7%,six hundred and seventy three billion, seven million, eighty two thousand, one hundred and eighty three naira(N673,007,082,183)with a percentage change of 6.8% in 2010, one trillion, three hundred billion naira(N1,300,000,000,000) with a percentage change of 93% in 2011. This amount kept on increasing grossly despite the partial subsidy removal. Hence, the attempt in this study is to assess the relative effect of subsidy removal on the welfare of Nigerians.

 

1.2       STATEMENT OF THE PROBLEM

The oil sector is one of the most critical sectors to economic and social development of Nigeria. Adequate oil supply is not only a strategic input for the national development but it is undoubtedly the most vital input in transforming the industrial sector for economic growth. Particularly in Nigeria where oil is the dominant source of revenue contributing more than 80% of its revenue and 95% of its foreign exchange income (Business Day Nigeria, 2011).

In the past, government has devoted so much money into the Nigerian oil sector in form of subsidy to ensure low prices of petroleum products to its citizens. This subsidized price is expected to have maximum welfare effect on poor Nigerian. However, the amount of subsidy has been on the increase in budgets while the expected low prices of petroleum products has also been increasing with various reforms in the oil sector. Thus, the initial societal welfare that is the goal of government subsidy in the oil sector is not being maximized. The problems have been corruption of both government agencies like the Nigerian National Petroleum Corporation (NNPC), the Petroleum Product Pricing Regulatory Agency (PPPRA) and firms participating in the oil sector as marketers. The corruption level can partly be associated with non-production of oil by Nigerian refineries hence producing below average capacity and high importation of refined petroleum product. Thus, the social cost of refining and importing fuel outside the country has outweighed the social benefit (high subsidized cost to government and high prices of fuel to the citizens). The above statement is evident by the recent government policy of deregulation of the sector via subsidy removal on the account that the subsidy does not reach the targeted citizens.

In  addition, over N1 trillion was claimed to have been lost to corruption as revealed by the House of Representative Probe Panel on subsidy fund Management. The Ad-hoc Committee findings also revealed the corruption by the NNPC and PPPRA along with 72 other firms which were to refund N1.07 trillion that was fraudulently paid to some oil marketers who never made any supply. Hence the real effect of oil subsidy removal on the well being  of Nigerian citizens need to be ascertained.

 

1.3       THE RESEARCH QUESTIONS

The following research questions will serve as an important guide to the study:

i.        What is the nature and trend of money put aside as subsidy by Nigerian government?

ii.      What is the cost and benefit of subsidy in Nigeria?

iii. What is the welfare implication of its removal of subsidy on GDP, budget and sect oral allocation?

Iv.How can the effect of subsidy removal be averted?

 

1.4       THE OBJECTIVE OF THE RESEARCH

This research is an attempt to investigate the controversy of government policy of removing fuel subsidy to reinvest the amount in the real sector and its possible implications on the welfare of its citizens as well as the economy. In addition, the research will;

i.                    To examine the nature and trend of money value set aside as subsidy by Nigerian government.

ii.                  To evaluate the cost and benefit of subsidy in Nigeria.

iii.                To assess the impact of subsidy removal on welfare via its impact on GDP, budget and sect oral allocation.

1.5       RESEARCH HYPOTHESIS

            The hypothesis to be tested in this research work, are;

(1)

H0 -      There is no relationship between subsidy and the people’s welfare in Nigeria.

H1-         There is relationship between subsidy and the people’s welfare in Nigeria.

(2)

H0-       Subsidy removal has no significant impact on the welfare of the Nigerian citizens.

H1 -         Subsidy removal has significant impact on the welfare of the Nigerian citizen.

 

1.6       THE SCOPE AND LIMITATION OF THE STUDY

The scope of this study is effect of subsidy removal on the welfare of Nigerians. The study focus only on the subsidy removal which has been a debate since 1999 till date. The study will in no way delve into serious political issues as this does not constitute part of the research objectives. The period to be considered is from year 2001 to 2011. The choice of the period is to enable the study to examine the implication of subsidy removal on economic activities of individuals in the society that are likely to be affected. The study looked at the implication of subsidy removal on budget and GDP.

 1.7    JUSTIFICATION OF THE RESEARCH

The major goal of any economic policy is to achieve optimal welfare for its populace. This welfare is a broad term that cannot be totally captured in this study. However, the research will only consider the aspect of welfare that can be measured in the amount of money spent on consumer goods and services, as emphasized by Jhingan (2003) that economic welfare is that part of social welfare which can directly be measured in money. He further stressed that increase in economic welfare can result into increase in the total welfare of any society.  This study highlights the cost and benefit of subsidy removal and its welfare implication on Nigerians.

This research will be relevant to the policy makers. It will guide them to make quality policy that will serve the best interest of the general public. Its recommendations will also provide some practical solutions to subsidy issues in Nigeria and finally, the research is expected to contribute to the general body of knowledge and further serve as reference material to future researchers in the field.

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1.8     CHAPTER ORGANISATION

This project is organized into five chapters; chapter one introduces the background of the study as well as the research problem, objective and the significance of the study. Chapter two deals with the literature review. The review of the relevant literature is further divided into: conceptual literature which examine the various definitions and meaning that scholars gave to the term subsidy. Theoretical literature deals with theory that explain subsidy implication on prices, quantities supply as well as quantities demanded while empirical literature sited other people’s research work and findings in similar study.

Chapter three focuses on the research methodology which outline the method adopted in the research. Chapter four is concerned with the data analysis, presentation and the interpretation of the result using the method specify in chapter three. Finally chapter five contains the summary, recommendations as well as the conclusions of the study.