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Friday, February 23, 2024

Beyond economics: The perils of removing Nigeria’s petrol subsidy

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By Abdulrauf Aliyu

In the realm of economic discourse, the removal of petrol subsidies in Nigeria has long been a contentious issue, with arguments largely centered around the ideals of economic rationality. While the pursuit of fiscal prudence and economic stability is indeed crucial, the story of Nigeria’s petrol subsidy removal goes beyond mere numbers and rationality.

It’s a tale of complexity and multifaceted consequences, one that resonates with the famous anecdote of the chemist, physicist, and economist stranded on a desert island, each offering their perspective on opening a can of baked beans. In Nigeria, where energy security is paramount, the decision to remove the petrol subsidy should not have been solely grounded in economic rationality, for its repercussions extend far beyond the realm of financial prudence.

As Nigerian President Bola Tinubu took the bold step of eliminating petrol subsidies, the public’s concerns reached a crescendo, reverberating throughout the nation. The world watched with bated breath as Africa’s most populous country embarked on a path fraught with uncertainty. While the economic rationale for subsidy removal may seem compelling on the surface, it is essential to recognize that economics alone cannot address the intricate tapestry of Nigeria’s socio-economic landscape.

Renowned economist Paul Samuelson once observed, “In the real world, economics has to come to terms with complexity.” Nigeria’s subsidy removal decision underscores this complexity. Energy security, particularly in the form of petrol and gasoline, is an essential pillar for the country’s economic growth and development. Reliable energy supplies in terms of accessibility, availability, and affordability are prerequisites for supporting industrial activities, powering businesses, and driving economic growth. Energy insecurity can lead to higher energy prices, which would have a domino effect, hurting businesses and, most significantly, the average consumer. It is also crucial for maintaining social stability.

In juxtaposition to Nigeria’s decision, the German Economy Minister, Robert Habeck, has been ardently advocating for an energy subsidy scheme in Germany. His argument hinges on the fact that German industry faces an arduous five-year transition period before renewable energies truly take root. He warns that without state support, Germany’s industrial landscape may wither as companies relocate their operations to countries with more favorable energy prices, such as France or the United States.

Germany’s proposal to cut taxes for energy-intensive industries or expand existing price subsidies is a testament to the complexity of managing energy-related policies. It is a recognition that economic rationality alone cannot address the multifaceted implications of such decisions.

The German situation, though distinct from Nigeria’s, raises pertinent questions about the potential consequences of subsidy removal. While Nigeria seeks to curtail subsidies for economic stability, it is vital to acknowledge that such measures can trigger inflation, increase the cost of living, disrupt the cost of doing business, escalate poverty levels, and negatively impact economic prosperity.

Economists often espouse the concept of a trickle-down effect, whereby the removal of subsidies should theoretically lead to more efficient allocation of resources and, in the long run, benefit the broader population. However, the Nigerian experience reveals that in a country with a fragile social safety net where a significant portion of the population lives below the poverty line, such optimism might be misplaced.

As renowned economist John Maynard Keynes wisely noted, “In the long run, we are all dead.” This sentiment takes on a stark reality in Nigeria’s case. While it is true that economic rationality suggests that petrol subsidies disproportionately benefit the affluent and do little to alleviate the burden on the poorest, the abrupt removal of these subsidies can have severe consequences for the common man and woman on the streets of Nigeria.

One of the most immediate and tangible effects of subsidy removal is inflation. Prices of essential commodities, including food and transportation, soar as transportation costs, heavily reliant on gasoline, surge. This inflationary pressure disproportionately affects those at the lower end of the economic spectrum, who spend a more substantial portion of their income on basic necessities.

High inflation, in turn, exacerbates the already high cost of living. In a country where access to quality healthcare, education, and other basic amenities is often a luxury, the burden on the average Nigerian intensifies. It is easy for an economist to rationalize that these sacrifices are necessary for long-term economic stability, but for those who are struggling to put food on the table, the immediate repercussions are palpable.

Moreover, the increased cost of doing business is a significant concern. Small and medium-sized enterprises, which are often hailed as the lifeblood of the Nigerian economy, are hit the hardest. The cost of production surges, and these businesses are compelled to pass on the burden to consumers, further perpetuating the cycle of increased living costs.
Another unfortunate consequence of subsidy removal is the potential to exacerbate poverty levels. The International Labour Organization (ILO) estimates that nearly half of Nigeria’s population lives in poverty, and the removal of subsidies without a robust social safety net could potentially push more Nigerians below the poverty line. As prices rise and employment opportunities dwindle, vulnerable populations face greater economic hardships.

Economic prosperity, which should be the ultimate goal of any fiscal policy, is often sidelined when subsidies are removed without comprehensive plans to mitigate their negative impact. In Nigeria’s case, it is evident that the pursuit of economic rationality, without due consideration for the human dimension of the policy, risks undermining the nation’s potential for prosperity.

In the grand narrative of economic theory, the invisible hand of the market is expected to guide the nation to a brighter future. However, as celebrated economist Amartya Sen astutely pointed out, “Development consists of the removal of various types of unfreedoms that leave people with little choice and little opportunity of exercising their reasoned agency.”
The removal of petrol subsidies in Nigeria should not be seen as a mere economic transaction but as a policy that affects the lives of millions. It necessitates a multifaceted approach that considers social safety nets, targeted support for vulnerable populations, and investments in alternative energy sources to cushion the blow.

While economic rationality is an indispensable aspect of policy-making, it must coexist harmoniously with the human face of policy. Nigeria, with its unique socio-economic landscape, is a testament to the complexities involved in such decisions. The voices of ordinary Nigerians, who often bear the brunt of such policies, must not be drowned out in the pursuit of economic rationality.

In conclusion, as Nigeria grapples with the ramifications of petrol subsidy removal, it is imperative to acknowledge that economics alone cannot provide a comprehensive solution to the challenges the nation faces. The complexity of Nigeria’s socio-economic landscape demands a holistic approach, one that not only addresses fiscal concerns but also embraces the human dimension of policy.

The words of the great economist John Kenneth Galbraith come to mind: “Economics is extremely useful as a form of employment for economists.” However, its true utility lies in its ability to shape policies that enhance the well-being of a nation’s citizens. Nigeria, as it embarks on this pivotal journey, must strike a balance between economic rationality and the human face of policy, for the fate of millions hangs in the balance. The removal of petrol subsidies is not just a matter of numbers; it is a matter of human lives and the prosperity of a nation.

Abdulrauf Aliyu
An economist and Policy Analyst writes from
45 Ashiru Road, U/Dosa New Extension
Kaduna

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