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.
.
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.