Nigeria: Will ending fuel subsidies boost the economy?

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.

Expensive fuel subsidies

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 (€8.5 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.

An economy powered by crude exports

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%.

Lack of oil refineries

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.

Shrinking foreign exchange reserves 

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.

The country's foreign exchange reserves are also in dangerous waters. They continue to shrink with each passing year. International financial experts warn that the country's naira currency could be devalued if the funds fall below the $30 billion mark.

The World Bank's latest country study leaves no doubt about how serious the situation is. "Nigeria is in a difficult economic situation that continues to deteriorate," World Bank experts wrote in the study "Nigeria's Choice," published in December.

Bleak economic outlook

However, the choices are somewhat limited, with falling tax revenues, rising fuel subsidy costs, and declining oil prices as oil production decreases. Add to that an inflation rate of more than 20%, and the economic outlook does not look positive.

Transparency International's ranking shows how corruption weakens Nigeria's economic activity. It is ranked 154 out of 180 countries surveyed in 2021, significantly deteriorating from position 144 in 2018.

Much of the oil and fuel shortage is due to theft. Government officials such as former Finance Minister Zainab Ahmed blamed rampant fuel theft for the gasoline and diesel shortages. 

Hope for new mega-refinery

Just outside Lagos, the giant Aliko Dangote refinery stands. It was launched at the end of May but is not fully operational. The incoming government is counting on Dangote's refinery to lessen the importation of refined oil products.

The refinery owner is billionaire Aliko Dangote, considered the wealthiest man in Africa. However, completion has been delayed for years.

With the investment by the private sector, it is hoped to create an alternative to state-owned refineries, Magaji says. The combined capacity of the four refineries is 450,000 barrels per day, compared to 650,000 barrels per day for the Dangote refinery.

Experts have long called for Nigeria to move away from oil dependence. Outgoing President Buhari tried to diversify Nigeria's economy but with little success. 

"The policy of diversification has unfortunately been going on for four or five decades," Magaji said. "We have talked about great revolutions, wanted to promote the mining sector and develop agriculture into an important branch, but we have not succeeded." The newly elected government now has a chance to push ahead with the long-awaited economic diversification plan.

This article was translated from German.

Edited by: Chrispin Mwakideu