For decades, the Nigerian government has been saddled with the responsibility of subsidizing fuel and fixing the retail prices of fuel. Despite the efforts to reform the subsidy placed on fuel, Nigeria has never been able to successfully achieve this removal. Nigeria, being the biggest producer of oil in Africa, has come under heavy attacks from World Bank and International Monetary Fund for the huge financial burden that it Carrie’s, in a bid to provide fuel subsidy, when this revenue could be invested into facilitating other services that would further enhance the country’s economic growth.
The Federal Government has however decided to halt its payments for fuel subsidy after June 2023. This decision is thus set to have a significant effect on many businesses operating within the country, the supply chain especially. The stop in subsidies will inevitably cause a rise in the cost of transportation and energy which will inadvertently cause manufacturers and distributors to increase the prices for their goods and services. This is predicted to remotely cause a decrease in demands for services and reduced sales, affecting the country’s economic growth. However, this could be a net positive, if handled properly.
Fuel Subsidy can stimulate economic activities & protect local businesses.
In truth, fuel subsidies are not a bad idea, as they play a major role in stimulating the economic activities and protecting the domestic economy by reduction of their energy revenue. Whether directly or indirectly, this is only typically achieved by the government giving financial support to reduce fuel prices. On the negative side, however, this can also catalyze waste and corruption. Between 2017-2021, the Economic and Financial Crimes Commission allegedly recouped about N13 billion as proceeds from illegal payments transacted under the subsidy regime. Though a painful financial blow, halting subsidy can enhance government’s finances, as well as ensuring access to boil products needed for their operations.
One major concern raised against the fuel subsidy removal is the lack of trust in the government in allocating the recovered gains to further develop the economy. Many people have been critical about the high cost of governance and the lackluster state of public infrastructures. Business wise, the malfunctioned oil refineries in the country makes the economy so vulnerable to the unpredictable global supply chain, as Nigeria imports all its refined oil products. Thus, a structured plan as to how these gains will be reinvested into the economy. Although the government has stated its position as to reviving the country’s refineries, it would be best to privatize it to give space for more revenue allocation. The government is also said to be exploring investing in Dangote Oil Refinery, the biggest in Africa and this gesture, it is believed, will help protect businesses.
Unstable energy supply also affecting supply chain businesses in Nigeria.
Another point for investors in the supply chain is the feeble condition of the public transport infrastructure in the country. In 2020, the Financial Times’ survey showed that transporting goods from the port to the main land, which is about 20km, cost about $4000, similar to the fee charged for Nigeria from China. With subsidies taken away, the coupes revenue can be used to facilitate the building of more ports, roads, train networks and bridges to reduce the cost of operations of most businesses within the supply chain.
Energy supply is another factor affecting supply chain businesses in Nigeria. As a result of the recurrent power shortage, most businesses have had to solely rely on oil generators for their energy. Last year, the price of diesel increased by 187.69 percent, according to the National Bureau of Statistics. This, in turn, caused a surge in the cost of business operations. One efficient strategy that the government can enact is the provision of subsidy for companies that invest in fuel-efficient sources for the generation of energy.
Reform will enhance the transition into clean energy sources.
However, one important benefit of the fuel subsidy policy reform is the ability to enhance a transition into cleaner energy sources, which would also enable supply chain businesses to enhance their sustainability practices. Sectors like agriculture, logistics and manufacturing would hugely benefit from this transition to clean energy like solar. Looking forward, while the global effects of a global chain crisis caused by Covid-19 and the Russia-Ukraine war have hugely affected the global economy, Nigeria must commence strategies to ensure a removal of the fuel subsidy.
Related Link
Central Bank of Nigeria: Website
