OPINION: Subsidy Removal: The Real Issue Is Better Management, Not Reversal

The renewed debate over fuel subsidy in Nigeria is hardly surprising. As the country approaches another election cycle, the question of whether the subsidy should be restored has once again moved to the centre of political discourse. For many Nigerians, the issue is deeply personal. The removal of the subsidy has significantly increased the cost of petrol, transportation, food and virtually every activity dependent on energy. It is therefore understandable that any political promise to make petrol cheaper would resonate with a population struggling with the rising cost of living.

Yet, the debate should go beyond the immediate attraction of cheaper petrol. Nigeria must ask a more fundamental question: what is the most economically sustainable way to use the country’s scarce public resources, and how can those resources be deployed to improve the welfare of citizens over the long term?

It is in this context that the removal of the fuel subsidy should be understood. The reform was necessary because the old subsidy regime had become an enormous burden on public finances, while also creating significant opportunities for arbitrage, smuggling, rent-seeking and other sharp practices.

According to figures cited in recent publications on the subject, Nigeria spent more than N15 trillion on fuel subsidy between 2006 and 2023, while more than N3 trillion was spent in the first five months of 2023 alone, before the subsidy was eventually removed.

The opportunity cost of such expenditure was enormous. Every naira devoted to keeping petrol artificially cheap was a naira that could not simultaneously be devoted to roads, schools, hospitals, security, agriculture, public transportation or other investments capable of expanding the productive capacity of the economy. The question, therefore, should not be whether Nigerians want cheaper petrol. Of course, they do. The more important question is whether Nigeria could continue to spend such enormous sums subsidizing petrol consumption when those resources could arguably generate greater social and economic returns elsewhere.

This is the central economic argument for the reform. A government cannot indefinitely borrow or divert scarce resources to subsidize consumption without compromising its capacity to invest in production. A cheaper pump price may provide immediate relief, but if it is achieved at the expense of investment in infrastructure, education, healthcare and productive enterprise, society eventually pays the price elsewhere.

Indeed, the old arrangement was particularly problematic because the benefits of the subsidy were not necessarily confined to those who needed government assistance most. A universal subsidy on petrol effectively subsidized consumption by everyone who purchased the product, including those with the financial capacity to pay the market price. It also created opportunities for fuel diversion and smuggling across Nigeria’s borders. In that sense, subsidizing petrol was not necessarily the same as subsidizing Nigerians.

This distinction remains important in the current debate. It goes without saying that subsidies in themselves are not inherently bad. Governments across the world use subsidies as policy instruments to support strategic sectors, protect vulnerable groups, stimulate production or respond to economic shocks. The critical issue is what is being subsidized, who benefits, how much it costs and whether the intervention achieves a clearly defined economic objective.

Nigeria should therefore be moving away from subsidies that primarily encourage consumption and towards interventions that stimulate production. If government must deploy scarce resources through subsidies, those resources should preferably be directed towards areas capable of expanding productive capacity, creating employment, reducing costs and strengthening the economy. Agriculture, manufacturing, transportation, and energy infrastructure are obvious areas where such an approach could yield wider economic benefits.

This does not mean that the hardship arising from subsidy removal should be ignored. On the contrary, the social consequences of the reform must be taken seriously. The sharp increase in the price of petrol has fed directly and indirectly into transportation costs, food prices, household expenditure and the operating costs of businesses. The combination of subsidy removal and other economic adjustments has placed considerable pressure on household incomes.

Government therefore has a responsibility to cushion the impact of reform, particularly for the poorest and most vulnerable citizens. But the solution should not necessarily be a return to an expensive and opaque universal petrol subsidy. Targeted social protection, improved public transportation, support for farmers and small businesses, and investments that reduce the cost of producing and moving food would provide a more sustainable response.

Be that as it may, the greater concern is what has happened to the resources and fiscal space created by the reforms. The Federal Government has reported that the fuel subsidy removal and foreign-exchange market reforms generated N15.8 trillion in additional resources for the Federation between June 2023 and December 2025. According to the figures attributed to the Finance Minister and Coordinating Minister of the Economy, N5.4 trillion accrued to the Federal Government, while N10.4 trillion went to states and local governments through the Federation allocation system.

The government has also explained that the N15.8 trillion should not be understood as a sum of money sitting in a separate account labelled subsidy savings. Rather, the gains were reflected largely in increased revenue collections arising from the reforms, including the higher naira value of dollar-denominated customs duties and other government revenues. The government further reported that it generated an additional N3.1 trillion in independent revenue during the period, while incremental borrowing amounted to N11.9 trillion, which it argued would have been significantly higher without the fiscal space created by the reforms.

These figures are significant and demonstrate that the reforms have produced fiscal gains. They also suggest that the removal of subsidy, together with foreign-exchange reform, has altered the government’s revenue position in a substantial way.
But fiscal gains alone cannot be the final measure of success. The Nigerian citizen who is paying considerably more to commute to work, feed a family or run a small business is unlikely to be persuaded by an improvement in government revenue figures unless that improvement eventually translates into visible improvements in living conditions. People experience economic reforms through the prices they pay and the opportunities available to them. They therefore have every right to ask what they are receiving in return for the sacrifice they have been asked to make.

This is where I believe there is a missing link in the implementation of the subsidy-removal reform: the absence of a sufficiently visible and measurable framework for linking the gains from the reform to specific development outcomes.

The expected savings and additional resources should have been more deliberately ring-fenced for clearly identified projects at both the federal and state levels. Nigerians should be able to see, for example, that a particular road, hospital, school, agricultural programme, public transportation project or other development intervention was financed from the fiscal space created by the reform. Such a system would not only improve transparency and accountability; it would help government build public confidence in a reform that has imposed considerable costs on citizens.

Nigeria has precedents for this approach. The Petroleum Trust Fund associated with the Abacha administration was established around a specific development mandate and became particularly associated with road projects.

The Jonathan administration’s Subsidy Reinvestment and Empowerment Programme, popularly known as SURE-P, was similarly designed around the deployment of resources associated with subsidy reform to specific programmes.

There are legitimate questions about the implementation and effectiveness of these past initiatives, but the broader lesson remains relevant: when citizens are asked to endure a painful economic adjustment on the promise of a better future, government must make that future sufficiently visible.

The reform requires a social contract. Citizens are being asked to pay more today on the understanding that the country will become fiscally stronger, more productive and better able to provide public goods tomorrow.

Tomorrow, however, cannot remain an indefinite promise.
This is also why the argument that subsidy removal has generated additional resources must be accompanied by stronger accountability from the states. If states and local governments have received substantially higher allocations, citizens should be able to demand evidence of how those resources are being used.

Increased allocations should translate into better rural roads, water supply, primary healthcare, basic education, agricultural support, local infrastructure and other services that directly affect people’s lives.

The same principle applies at the federal level. If the Federal Government has gained additional fiscal space, Nigerians should be able to identify the development outcomes associated with it. Transparency should not stop at reporting how much money has been generated. It should extend to showing how the resources have been deployed and what they have achieved.

The other major requirement is continued liberalization and investment in the petroleum sector. The removal of the subsidy should not be viewed as the end of reform but as part of a broader process of restructuring the industry. The Petroleum Industry Act provides an important framework for creating a more commercially oriented, competitive and investment-friendly petroleum sector. The objective should be to encourage more players and more private investment across the value chain.

Particular attention should be paid to domestic refining. Nigeria cannot sustainably resolve the problem of high petrol prices simply by changing the mechanism through which the government supports consumption. The country must expand its capacity to refine crude oil domestically and create genuine competition among refiners and petroleum marketers.
This should include encouraging investment in modular refineries, which can complement larger refining facilities and increase the number of participants in the downstream petroleum market.

More competition, more refining capacity and greater domestic supply should, over time, place downward pressure on prices and reduce the economy’s exposure to the cost and volatility associated with imported refined products.

There is also a case for government to make renewed efforts to revamp its existing refineries while considering appropriate forms of partial privatization or strategic private-sector participation. The objective should not be government ownership for its own sake, but efficiency, accountability and reliable production. If private capital and expertise can make public assets more productive, government should be willing to explore such arrangements.

It is a no-brainer that the most sustainable way to bring down the cost of petrol is not to keep subsidizing it indefinitely but to reduce the cost of producing and supplying it. That is why the current political debate over whether to restore subsidy should be approached with caution. In this regard, proponents of a return to subsidy must explain how much the policy would cost, how it would be financed, who would benefit and how the country would prevent a return to the corruption, smuggling, arbitrage and opacity associated with the old system.

A subsidy may offer immediate relief, but it is not free. Somebody must pay for it. If government pays, then the money comes from revenue, borrowing or expenditure that could otherwise have been directed elsewhere. The opportunity cost must therefore always be part of the conversation.

By the same token, those defending subsidy removal must also accept that the reform cannot be judged solely by the amount of money government saves or the increase in government revenue. The ultimate test must be whether the reform helps Nigeria build a more productive economy and whether ordinary Nigerians eventually experience tangible improvements in their standard of living.

Indeed, Nigeria needs to move beyond the false choice between cheap petrol and economic hardship. The real objective should be to build an economy in which Nigerians can afford the energy they consume because incomes are rising, production is expanding, transportation is becoming more efficient and domestic refining is reducing supply costs.

The country should therefore stay the course on petroleum-sector reform while correcting the weaknesses in the implementation of subsidy removal. The government should strengthen targeted social protection, improve public transportation, invest more heavily in agriculture and other productive sectors, promote domestic refining, encourage competition and make the use of the additional fiscal resources more transparent and measurable.

Most importantly, the savings and fiscal gains from difficult reforms should be converted into assets and productive capacity that will continue to benefit Nigerians long after the political debate over subsidy has ended. Nigerians do not necessarily need cheap petrol forever. What they need is an economy in which they can afford the petrol they buy.

All said, the success of subsidy removal should therefore not be measured simply by whether government stopped paying the subsidy but by whether it succeeded in converting that difficult sacrifice into a more productive economy, stronger public services, increased domestic production and a better quality of life for the ordinary Nigerian.

Prof Uche Uwaleke is Director of the Nasarawa State University Institute of Capital Market Studies and President of the Capital Market Academics of Nigeria