Why subsidy should never crawl back into Nigeria’s economic discourse

The ongoing discourse over Nigeria's economic reforms, especially the removal of the petrol subsidy, is crucial. Government policies must be open to criticism, particularly when they impact citizens' daily lives. Professor Bongo Adi, an esteemed economist, highlighted the Rule of 70 to estimate the time needed for an economy to double at a constant growth rate.

However, this rule assumes constancy, whereas real economic outcomes are dynamic and influenced by emerging trends. The Rule of 70 alone cannot accurately predict Nigeria's growth trajectory; it is too simplistic for a complex economy.

Subsidy is a legitimate policy tool. Governments employ it to safeguard consumers, foster strategic industries, correct market failures, and mitigate temporary economic shocks. In Nigeria, the petroleum subsidy evolved over decades, initially to moderate inflation, stimulate industrial development, and provide affordable energy.

However, as domestic refining capacity declined and dependence on imported petrol grew, the subsidy became more significant and costly. The fiscal burden of subsidizing petrol became unsustainable, with "under-recovery" indicating the cost of selling petrol below its supply cost. This system fostered smuggling and arbitrage, undermining domestic refining investment.

The decision to remove the subsidy has improved government fiscal space by eliminating a substantial and wasteful expenditure. It has also reduced foreign exchange distortions from fuel imports and smuggling, bolstered Nigeria's external position, and bolstered confidence in the nation's fiscal and monetary policies. The World Trade Organization (WTO) acknowledges these reforms as significant steps towards addressing structural weaknesses and generating fiscal space. International credit-rating agencies have also given positive assessments.

While the removal of the subsidy has caused immediate social costs, it is a necessary price for an enduring recovery. International examples demonstrate that successful subsidy reforms require credible social protection, transparent communication, and the judicious use of released resources. Countries like Indonesia, Iran, the Philippines, and Ghana have shown that social protection measures, clear communication, and consensus-building can enhance the durability of subsidy reforms.

Reversing the removal of the subsidy would negate these gains, restoring the fiscal burden, rekindling smuggling, and weakening domestic refining incentives. Ultimately, it would fail to address the broader economic issues and return Nigeria to a less efficient, more costly situation.