In practice, rich people benefit most from gasoline subsidies and poor people benefit only 3%. This is according to the World Bank in its recently published Nigerian Government Finance Review report. The report went further, stating that universal price subsidies for petroleum products are almost always regressive because the rich consume much more than the poor, both directly and indirectly.
Gasoline subsidies are especially regressive because they are used mostly on light and medium-sized vehicles, which are rarely owned by the poor, and gasoline is also much less of an intermediate good than diesel.
The report points out some factors that might be hindering Nigeria’s economic development. It states:
- “The cost of the subsidy increased from 4% of federation oil and gas revenue captured by the Nigeran National Petroleum Company Limited in 2020 to 42% in 2021, an unsustainable tax burden for a country with Nigeria’s massive infrastructure deficit and a very underserved population.
Distorting efficiency incentives: The report also says that Nigeria’s gasoline subsidy distorts efficiency incentives, promoting non-essential and inefficient use. The subsidy also makes gasoline much cheaper in Nigeria than in neighboring countries, creating huge financial incentives for smuggling and benefiting crime syndicates at public expense.
In October 2022, President Muhammadu Buhari announced that the gasoline subsidy would be removed in June 2023, when he left office, effectively transferring responsibility to another administration.
The World Bank report recommends the next steps for Nigeria to reverse the stagnant nature of its economy as a result of wasteful spending, especially the payment of gasoline subsidies. The report says:
- In the short term, no other reform is more important than completely eliminating gasoline, electricity, and exchange rate subsidies so that all levels of government can use part of the savings to invest in very valuable human and physical resources. necessary. capital and protect the poor and vulnerable with targeted programs.
- Public support for removing these harmful and inefficient subsidies can be gained by establishing a “pact” that combines subsidy removal with identifying key services and support programs (time-bound cash transfers for the poor) to be delivered with the savings. , and a commitment to adhere to spending ceilings for “general administrative costs”, which currently absorb a high proportion of total spending.
- Safeguard oil and gas revenues by protecting the federation’s oil and gas assets and ensuring the federation receives what it is owed.
For the record: The World Bank report says that lessons from international experience make it clear that no amount of government action can effectively stop the diversion of subsidized fuel as long as large price differences persist.
- The World Bank recommends that the government seize the opportunity to expand social protection following the Covid-19 pandemic, to phase out the gasoline subsidy while using cash transfers to safeguard the well-being of poor and middle-class households. .
- The World Bank notes that Nigeria’s gasoline subsidy creates fuel shortages and rationing through increasing black market prices paid by end users. According to the World Bank, monthly fuel price surveys covering all 36 states and the Federal Capital Territory show large variation in actual gasoline prices paid, especially in times of acute gasoline shortages.