NiIGERIAN CASE-FILE: Ending fuel subsidies to boost the economy

T KOHLMANN, M SCHWIKOWSKI

Nigeria’s newly inaugurated President Bola Ahmed Tinubu’s decision to abruptly end fuel subsidies triggered a backlash and a rush to the country’s gas pumps. Tinubu’s [off the cuff] announcement to slash fuel subsidies put an end to the government program that has kept the price of petroleum products low in the country for years. Many Nigerians are now worried about their livelihood. Around 220 million people live in the West African country, and by 2050 it is estimated that number will grow to 375 million. The state of Lagos alone has a bigger economic output than Kenya. Moreover, Nigeria generates a larger gross domestic product (GDP) than all other West African states combined.

The dilemma is enormous because the state budget has come under increasing pressure: Some weeks ago, the chief executive officer of the state oil company Nigerian National Petroleum Company (NNPC), Mele Kyari, said Nigeria would require some $9.1 billion to meet its fuel subsidy needs this year. The skyrocketing cost of fuel subsidies and the economic losses from falling oil prices recently led Nigeria to fund its budget only through an emergency loan from the International Monetary Fund (IMF). With the World Bank’s financial injections, $5 billion have flowed into Nigeria since the beginning of the COVID-19 pandemic to keep Africa’s largest economy from collapsing.

Nigeria’s economic machinery is driven by crude oil, which is found in massive deposits in the Niger Delta. But despite the natural wealth, the economy is struggling. Economic growth is lower than population growth; experts warn of rising poverty and social unrest. The reasons for this downward trend are evident. Oil production has fallen to an all-time low. According to Nigerian economist Afolabi Olowookere, whom The Guardian Nigeria cited, the oil sector’s share of government revenue dropped from nearly 47% in 2017 to a meager 7.4% in the first half of 2022. Nigeria has failed to benefit from the global oil price boom. As a result, the oil sector’s share of Nigeria’s GDP has also virtually halved since 2010, from more than 13% to just under 6%.

Nigeria’s core problem is that it relies almost entirely on expensive imports to meet its gasoline needs — despite being Africa’s largest oil and gas producer. Nigeria has four state-owned refineries, but they have become dilapidated and idle due to mismanagement. The government pours billions of dollars into fuel subsidies yearly to cushion the social consequences. However, consumers then feel the costs at the pump. This has even led to the smuggling of cheaper gasoline from neighboring countries.

Muazu Magaji, an expert on oil resources in Lagos, cites the lack of strategy on the part of politicians as a crucial element for this desolate economic situation. “It’s a fact that the government itself has not developed a vision for energy security,” Magaji told DW. President Tinubu — who replaced his predecessor, Muhammadu Buhari — is trying to chart a new course.

According to energy economist Adero Okudo, it is vital for Tinubu to win the support of all major interest groups in the oil sector and communicate effectively with them, he says in an interview with DW.

But the financial challenges are coming back with a vengeance. In 2018, the IMF appealed to Nigeria to curb its rising debt and diversify its economy to avoid a crisis. This becomes abundantly clear when looking at the oil sector. Daily production of 1.8 million barrels per day before the pandemic has plummeted to around one million.

This article was provided by Deutsche Welle