Challenges of policy-making and the impact of fuel subsidy removal, By Bolutife Oluwadele

Introduction

Policymaking is a process of decision making on how a problem encountered in any society can be solved. It entails the formulation, adoption and implementation of decisions in other for a problem to be solved. Also, it aims at changing future situations to make them better than the present. Effective policy-making ensures that any nation grows and does so favourably. On the other hand, policy failure is the adverse effect of any poor policy to an economy, society or government. Any policy decision can fail to yield good results to any nation. One of the policies that made Nigeria unpopular since 2020 has to do with the removal of subsidy on petrol. This article is about policy making failures, and the case scenario here to be discussed is the impact of fuel subsidy removal in Nigeria.

Background

Nigeria has a decades-long policy of subsidising fuel, as it aims to keep the price of petrol low in order to shield the population from the volatility of global oil prices, and help economic stability. Because of the negative economic effects associated with fuel subsidies, and the concerns of fiscal deficit, the Federal Government decided to remove this drain on national resources in 2023.

Economic Challenges

The removal of fuel subsidies in Nigeria has led to several economic challenges:

1. Financial obligation: The cost of maintaining the fuel transport subsidies put intense strain on the national budget, as the government spent vast sums of money on these every year. It overran the budget to the extent that government barely managed to allocate sufficient monies to the health and education sectors.

2. Economic perversion: Fuel subsidies perverted the economy by providing an artificial fuel price, which largely benefited the elite and gas smugglers, rather than alleviating the burdens of the greater population, as intended.

3. Inflation: The sudden removal of the fuel subsidies caused a sudden surge in fuel prices, leading to inflation. Transportation costs increased and goods became far more expensive, putting additional stress on households and businesses.

4. Impact of SMEs: Small and medium scale enterprises were really hit by this sudden increase in the price of fuel. Most SMEs base their activities on the use of fuel, and the sudden increase in its price ate deeply into their profits and sustainability.

Social Challenges

The social impact of fuel subsidy removal has been profound:

1. Public Disapproval: There has been widespread dissatisfaction at the manner in which the removal of the subsidy was carried out, which public scholars consider as shortchanging the public in the palaver of reforms.

2. Poverty and Inequality: The poor, who are in the greatest need of subsidised fuel, were the hardest hit by the removal of subsidies. The resulting exacerbation of poverty and inequality in the country highlights the folly of the move.

3. Protest Riots and Unrest: Because citizens were impacted heavily by the removal of subsidies, they protested and rioted on the streets. Unions and citizens went on marches and demanded the reinstatement of subsidies.

Political Challenges

The political ramifications of the policy decision were significant:

1. Trust Failure: Many Nigerians believed the government had not provided them with an opportunity to disagree with the decision to remove subsidies. It was a trust failure at the highest level.

2. Corruption and Mismanagement: The administration of fuel-subsidy programmes has long been dogged by corruption and mismanagement, and the removal of subsidies brought all of this to the forefront and raised the demand for greater transparency and accountability.

3. Policy Implementation: The effective and transparent implementation of policy proved difficult. The government faced challenges in bringing about the positive impact of removing the subsidy and mitigating its negative impact.

Case Studies and Examples

1. Smuggling and Arbitrage: Fuel subsidies incentivised smuggling and arbitrage where smugglers resold subsidised fuel in neighbouring countries at a higher price and grabbed the profits. By removing subsidies, these illegal activities they were discouraged.

2. Comparative Analysis: other countries that have reduced or removed fuel subsidies (eg, Indonesia and Egypt) have been forced to confront similar pitfalls. Yet they have also given us glimpses into how to smooth the political and economic roads toward such a transition.

Lessons Learned

1. Gradual Approach: Since the cost to citizens, businesses and local, state and federal government would rise, the policy changes should be gradually implemented over a long period of time to allow for a smoother transition to meet the targets set. An example of this is phasing out subsidies over time so the shock is not all at once but distributed over years.

2. Stakeholder Engagement: Inviting stakeholders into the policy-making process can facilitate the implementation of the new standards and nurture public trust in the policies. Conducting dialogue with the labour community and with businesses will improve the chances of policy success, as will seeking input from other relevant stakeholders in public discourse.

3. Transparency and Accountability: Transparency and accountability in policy implementation is needed to minimise possible corruption and mismanagement. An open system of communication and monitoring mechanisms should be in place to ensure public acceptance and for impact.

Policy Alternatives to Fuel Subsidy Removal

1. Gradual Phasing Out of Subsidies

Fuel subsidy removal can be phased out in a manner that minimises the shock and inflationary pressures associated with a sudden removal. Instead of implementing an immediate and large cut, subsidies can be reduced on a piecemeal basis over time to help the economy and population adjust. For example, the government could announce a clear and well-publicised schedule for phasing out subsidy reductions, giving firms and households forward visibilility to plan and adapt.

2. Targeted Subsidies

Targeted subsidies recognise the capacity constraints of the poor, who will often leave subsidised goods and services to patronise market prices. Targeted subsidies are investments that are oriented towards the most vulnerable, elevating support for those who need it the most – low-income households, users of public transport, essential workers, etc. These subsidies can be implemented through cash transfers, vouchers or subsidies for goods and services.

3. Compensation Mechanisms

Compensating mechanisms would therefore be key, for instance cash transfers directly to low-income households, social welfare programmes and subsides for basic foods and services. The government could for instance transfer cash on a monthly basis to all households to compensate them for the increased cost of living resulting from the removal of the subsidy for fuels.

4. Diversification of Energy Sources

To curtail the consumption of petrol and diesel, the government can promote the use of Compressed Natural Gas (CNG), which is a cleaner energy source such as the electric cars. The government can incentivise the use of CNG by reducing the prices of fuel and consumption of CNG.

They can provide the incentive of tax exemptions, offer subsidies on the cylinder, and invest significant capital on the CNG stations at the time of transportation.

5. Strengthening Public Transportation

Investments to enhance the public transport systems, like buses and trains, will reduce dependence on private vehicles and at the same time decrease fuel consumption in the long term. Overall, the described effects will reduce the impact of fuel pricing on the general public.

6. Enhancing Transparency and Accountability

This includes making subsidy management and spending transparent and accountable, and enacting alternative policies. That means making sure that potential beneficiaries understand policy decisions, that they are periodically monitored and evaluated, and that these transitions are overseen by independent experts that can instil public confidence. Transparency can help governments make sure that they deliver the advantages of policy shifts they intended.

7. Public Awareness and Engagement

They involve explaining to the citizenry why the subsidies are being removed (‘because we are taking out the policy to bring in the fossil fuels’) and what the advantages of the alternative policy programme are. Stakeholder engagement of key constituencies such as labour groups, the business community and civil society more generally, involves prize-givers rather than punishers. These are likely to be enthusiastic about the changes in policy.

8. Economic Diversification

Finally, diversification diffuses economic dependence on oil revenues. If several economic sectors, such as agriculture, manufacturing and technology, can be harvested for domestic revenue and employment, the removal of fuel subsidies and the volatility of oil price will not be so crippling to the domestic economy. In turn, if the domestic economy has solid foundations, stabilising oil prices would bring significant and sustainable economic growth.

Potential Challenges for each Policy Alternative

1. Gradual Phasing Out of Subsidies

Challenges

Public Resistance: Even if the subsidies go in slowly, there will be resistance as people are accustomed to the cheap fuel.

Inflation: Even if inflation is gradual, piecemeal repeal can still result in incremental inflation of the cost of living over time.

Political Will: keeping a stable policy with different administrations is difficult.

2. Targeted Subsidies

Challenges

Identification of Beneficiaries**: Accurately identifying and reaching the most vulnerable populations can be difficult.

Administrative cost: Tariff sticks involve large administrative systems for running and monitoring targeted subsidies, which are costly and complicated.

Leakages and Corruption: Some of the targeted subsidies will be wasted through leakages and corruption.

3. Compensation Mechanisms

Challenges

Funding: Ensuring the availability of adequate funding to support compensation mechanisms is challenging in the context of a tight fiscal environment.

Implementation: Effective implementation requires efficient systems to ensure timely and accurate distribution of compensation.

Sustainability: It’s sometimes hard to make compensation mechanisms sustainable in the long term if economic conditions worsen.

4. Diversification of Energy Sources

Challenges

Infrastructure Development: Required infrastructure (for example, for CNG) is a capital investment and takes time.

Public Acceptance: it is difficult to encourage the general public and business to switch to alternative energy technology.

A good regulatory framework will allow for the success of alternative energy, but will be difficult to put into place.

5. Strengthening Public Transportation

Challenges

Investment: Significant investment is required to improve public transportation infrastructure.

Maintenance: Ensuring the maintenance and sustainability of public transportation systems can be challenging.

Behavioural change Stimulating citizens to move from the private motor vehicle to public transport means behavioural change is required.

6. Enhancing Transparency and Accountability

Challenges

Institutional Capacity: Building the institutional capacity to ensure transparency and accountability can be difficult.

Vested Interests: People are afraid they won’t benefit from change.

Monitoring and Evaluation: Establishing effective monitoring and evaluation mechanisms requires resources and commitment.

7. Public Awareness and Engagement

Challenges

Communication: Effectively communicating the reasons for policy changes and their benefits can be challenging.

Misinformation: Countering misinformation and building public trust requires consistent and transparent communication.

Engagement: Ensuring meaningful engagement with all stakeholders, including marginalized groups, can be difficult.

8. Economic Diversification

Challenges

Investment: Diversifying the economy requires significant investment in various sectors.

Human Capital Development: Fostering the requisite human capital to drive new industries is often difficult to achieve.

Market access: If new industries and products click, making sure that they have access to your markets. This can be tricky.

Although these policy options might make distortions associated with fuel subsidy removal manageable, each has its own issues. In planning, implementation and evaluation, these policy options must be carefully considered if Nigerians are to experience sustainable growth and development outcomes caused by removing fuel subsidies.

Conclusion

Nigeria’s embattled decision to remove fuel subsidies and its dire economic, social and political consequences are a potent reminder to policymakers that their deliberations involve staking out the trading spaces among very real (and bad) alternatives: they can go slow and carefully consider options and their consequences, while engaging their domestic and exogenous stakeholders along the way and demonstrating the path they have taken. They can go slow and hope for a continental or international circumstance to bail them out of their predicament; they can go slow and boast that they are exploring a number of options to minimise the blow, but clamp down when things get uncomfortable; or they can go any one of these ways and pretend that they had choice in the matter in the first place. We can learn from these experiences to help nations and governments build a more secure tomorrow for their citizens.

Bolutife Oluwadele is an author, chartered accountant and public policy scholar based in Canada. Email: bolutife.oluwadele@gmail.com