Fuel Subsidy Aftermath

Subsidy… is Gone!!!

This declaration by the new president of Nigeria, Senator Bola Ahmed Tinubu, at his inauguration on May 29 marked the beginning of a new reality for Nigerians. Fuel queues immediately resurfaced after the speech and by the third day, a new PMS Pump price was announced. From N197/litre, the price jumped to N500/litre. Then, on the 19th of July 2023, another round of increase was announced – to N568/litre (and as high as N700/litre in some states). This amounts to about 188% – 200% increase in price in less than 2 months.

While this announcement has been received with mixed feelings, there is nothing mixed about the impact at all! It has all been in one direction – general hike in prices – transportation, food, services – EVERYTHING!

General AI (Attendant Implications)

1.       Implications on the Economy

The removal of the subsidy is expected to provide the government with more funds to inject into the various sectors of the economy. This should, potentially, lead to economic growth. While economic growth is not dependent solely on the availability of funds (the subsidy removal has so far been reported to have resulted in an additional N1 trillion surplus for the federal government), the infrastructural development, cost of governance and other government policies are critical areas that aid economic growth. 

But generally speaking, the following are the immediate impacts of the subsidy removal by the federal government:

• Inflationary Pressure: The abrupt increase in fuel prices has directly affected the cost of transportation, which is a critical component of the overall cost structure for goods and services. As transportation costs rise, businesses pass on the burden to consumers, leading to higher prices. This surge in prices erodes the purchasing power of the populace and intensifies the hardship faced by the poor and vulnerable.

• Cost of Production: Businesses in Nigeria rely heavily on fuel to power their operations. The removal of subsidies has resulted in soaring fuel costs, amplifying production expenses for manufacturing, transportation, and agriculture industries. This increase in the cost of production diminishes business profitability and hinders potential investments in the economy.

• Investment Climate: Removal of subsidies can send positive signals to foreign investors and international financial institutions, demonstrating Nigeria’s commitment to economic reforms. This could potentially attract increased foreign direct investment (FDI) in the long run, stimulating economic growth and development. This is however subject to how other related issues are handled by the government

2.       Implications on the Society (the people)

• Socio-economic Disparities: This subsidy removal has disproportionately affected the lower-income segments of society. As fuel prices surge, it leads to a ripple effect on the overall cost of living, particularly for those who spend a significant portion of their income on basic necessities. The result is an exacerbation of socioeconomic disparities, widening the gap between the rich and the poor.

• Transportation Costs: Transportation in Nigeria is primarily powered by PMS. Therefore, any increase in fuel prices directly impacts transportation.  The increase in fuel prices therefore directly impacts transportation costs for daily commuters and businesses.

• Social Unrest: History has shown that abrupt and significant fuel price hikes can lead to protests and social unrest. With the cost of living becoming unbearable for many Nigerians, protests and strikes are almost inevitable. If not well managed, all these could disrupt economic activities, and businesses and discourage investors.

3.       Implications for Businesses

• Operating Expenses: Businesses, particularly micro, small and medium-sized enterprises (MSMEs), face a substantial increase in their operating expenses due to higher fuel prices. For businesses with tight profit margins, absorbing these additional costs might be untenable, potentially leading to job losses or business closures.

• Supply Chain Disruptions: With transportation costs on the rise, businesses encounter supply chain disruptions, as timely deliveries become more challenging and costlier. This can lead to inventory management issues and affect the overall efficiency of businesses; eventually dimming their profit margin.

• Export Competitiveness: Nigerian businesses that rely on exporting goods may face challenges in maintaining their competitiveness in the global market. The higher cost of production and transportation can make Nigerian products less competitive compared to goods from countries where fuel subsidies still exist. This affects the capacity of Nigerian brands to compete profitably and effectively in their industry. 

Way Forward

For businesses seeking ways to survive and then flourish during this period, urgent steps and actions are required:

Validate your WHY

Eliminate Waste

Optimize Value

Build the RIGHT Culture

The earlier businesses get going on addressing these issues, the better their chances of riding out these waves and making the most of the developing situation

Conclusion

It will take a generation for the impact of these changes to be fully recovered. While it is hoped that funds saved from subsidy will be redirected to other pain points of the economy and spur economic growth, the immediate impact on the people and businesses calls for strategic responses and ruthless execution. The government must consider targeted interventions for the productive activities of the economy, not just from a survival consideration, (because this will only widen the poverty net and deepen the hole); but for the sustainable impact on people.

Previous 2022: Going, going…not yet gone

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