The sudden but predicted removal of fuel subsidy has sparked some fireworks and a lot of incoherence about the Nigerian economy and its sociopolitical currents. In the matter of subsidy, I suspect that there is as much consensus as confusion. The major presidential candidates all committed to removing fuel subsidy, although with different nuances about […]
The sudden but predicted removal of fuel subsidy has sparked some fireworks and a lot of incoherence about the Nigerian economy and its sociopolitical currents. In the matter of subsidy, I suspect that there is as much consensus as confusion. The major presidential candidates all committed to removing fuel subsidy, although with different nuances about what comes before and after.
The intersection of the economics of subsidy removal and the economics of poverty reduction in Nigeria frames the fight over subsidy removal. The two broad camps opposing each other on the wisdom of the abrupt and complete removal of fuel subsidy are looking through two different lenses: efficiency and equity. The efficiency camp focuses on the balance sheet of government. Subsidy creates a big hole there and contributes to fiscal bankruptcy of the federal government.
The efficiency logic goes together with the argument about the proper role of government. Public sector economics believes that a state properly plays three roles in a society: allocative, distributive and stabilization roles. The allocative role of the state prescribes efficiency, which requires that the state allocates resources to where it is most efficiently utilised. Proper pricing is one mechanism of attaining allocative efficiency.
There is no doubt that Nigeria can ill-afford this level of subsidy payment with its low revenue profile. The fiscal crisis of the Nigerian economy is endemic and needs a drastic action to stabilise. That brings up the third role of government in public finance: stabilisation. The government should consider how its fiscal and monetary policies affect employment, prices, and productivity. The inflationary impact of subsidy removal may undermine growth and economic recovery.
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