Part IV of IV: Nigeria’s failed attempt at subsidy reform

Nigeria Oil (REUTERS/Akintunde Akinleye)

This final part in the GRI Series on energy subsidies examines Nigeria’s attempt at reform, and why it went wrong. Gradual adjustment and decision transparency are key elements of success.

Nigeria provides an excellent case study on the failure to properly manage the removal of energy subsidies. Currently the eighth most populous country in the world, Nigeria produces the most oil in Africa and is the world’s fourth largest exporter of liquid natural gas. As is common among energy rich countries, Nigeria heavily subsidizes the cost of fuel by capping gasoline and kerosene prices.

The Brookings Institute estimates this cost the Nigerian government $8 billion in 2011, or roughly 30% of government expenditures. The subsidies have displaced important investments while disincentivizing refining production. While the country exports large quantities of oil and gas, its own ability to turn those raw resources into usable domestic energy remains low. This motivated the Nigerian government to begin planning the removal of subsidies in 2011.

A failed attempt at reform

On January 1, 2012, President Goodluck Jonathan and the Nigerian government surprised the county by increasing the price of gasoline 117%, matching the prevailing supply cost. Protests spread across the country, turning deadly when police fired into crowds in the city of Kano. Given Nigeria’s energy wealth, many of its citizens felt that the low price of fuel was one of the few ways the state shared prosperity.

Budgets are tight for many Nigerians (85% of the population lived on less than $2/day in 2010) so the sharp increase in fuel costs quickly galvanized unrest. A national strike shut down most of the country, and the government went as far as to say the country risked descending into “anarchy.”

On January 16, President Jonathan partially reversed his decision, lowering prices back near the original capped price. Over the course of two weeks, ten people had died, 600 were wounded, and Nigeria’s economy had ground to a halt. Clearly the government made a serious error. What went wrong?

Distrust of the government and sharp adjustments

The Nigerian government had mounted a public campaign arguing for the removal of energy subsidies. However, it only lasted six months and failed to convince the National Assembly of the merits of the idea. The government promoted a mitigation effort dubbed the Subsidy Reinvestment and Empowerment (SURE) program, but announced it only a month before it eventually decided to raise prices.

There was no comprehensive study done to support claims about cost, and the government timeline for enacting the reforms was not transparent. In a country with low trust in government, this proved to be a crucial misstep.

The IMF noted that “the new administration had yet to establish the credibility that it would live up to its commitments…” Finally, price increases were implemented too rapidly to allow for a gradual readjustment of people’s budgets and for mitigation measures to take effect.

Nigeria’s attempt at reforming its energy subsidy program offers a number of lessons.

Foremost among them is the need for civic engagement to build both awareness and trust. The government needed to be open on the issue. Instead it veiled its true intentions to the National Assembly and the Nigerian people.

As many countries around the world (such as Indonesia, Malaysia, Argentina) debate energy subsidies, investors and markets should focus on how the governments explain the costs of subsidies and the logic of their removal to the people. Otherwise, people may sour on the idea, making reform difficult. An inability to effectively reform subsidies could be a red flag for deeper issues within emerging market governments.

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Categories: Economics, Sub-Saharan Africa

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2 Comments on “Part IV of IV: Nigeria’s failed attempt at subsidy reform”

  1. Kevin Amirehsani
    April 19, 2014 at 4:14 am #

    Agreed. It should also be noted that the convoluted system where only a few politically connected Nigerians and firms are given the right to import refined oil and at prices often above the market price was full of shady dealings and skimmed public budgets. Jonathan, Okonjo Iweala, and the like had a golden opportunity to use this obvious corruption that everybody knew about to get the people on their side. But, as you rightly observed, people’s trust in the government to be able to curb such embezzlement and political patronage was very low, and in their eyes the subsidy was the only concrete positive they were receiving from the authorities. Plus, the privileged few who benefit of this grand subsidy scheme are very well connected politically.

  2. Ned Pagliarulo
    April 21, 2014 at 1:31 pm #

    Thanks for commenting. Excellent point about only the connected gaining the right to import.

    I think that many Nigerians probably feel that they benefit from the subsidy as they see cheaper prices at the pump, lowering their daily costs. However, over the long term, the question should center on whether it would be more beneficial to invest that money in public infrastructure and human services. If the government can build credibility, that should be possible. However, if the people continue to mistrust public officials, I don’t think there’d be extensive support for the removal of subsidies.

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