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THE EFFECT OF OIL
SUBSIDY ON THE WELFARE OF NIGERIANS
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO
THE STUDY
According to Oxford Dictionary of economics, subsidy is a
payment by the government to consumers
or producers which makes the factor cost received by producers greater than the
market price charged by producers. It is a financial aid granted by a
government to individuals or groups; usually in the form of cash payment to an
industry or tax reduction so that price of commodity or a service may remain
low for reasons of public welfare. Governments grant subsidy to supplement
citizens income, influence the cost and supply of some vital commodities to
make price competitive, to remove some type of burden and to gain political
will. Subsidy can also be an interventionist programme which aim at reducing
the negative effect of market competition as put forth by the United Nation
(2001), that “government intervention which may involve the use of subsidy, is
intended to remedy such market failure either by addressing their causes or by
trying to replicate the outcome of a perfect market”. Hence, social
consideration such as concern for the poor, the sick and the disadvantaged may
also provide a rationale for subsidizing fuel.
Nigerian government like other countries of the world is not
an exception in ensuring the provision of such social safety nets. Over the
years, it has used N3.0 trillion on fuel subsidy between 2009 and 2011 to
provide for social and economic welfare. (Business Day Nigeria, 2012). This
amount can be compared with the combined Federal Government budget deficit for
the same period which was approximately N3.3 trillion. In 2011 alone, the
amount spent on fuel subsidy was over N1.3 trillion which was greater than what
was allocated to agriculture, infrastructure, education, and health(Business
Day Nigeria, 2012). Among the products produced in the oil sector, premium
motor spirit is the most consumed by Nigerians due to its significance in car
use; with various fuel subsidy debate, this product price is usually more
affected in terms of increase in its price. The increase in the product price
usually affect consumer welfare due to its effect on transportation and
consequently increase in price of other products that are associated with
premium motor spirit, which includes kerosene,wax,bitumen e.t.c. Premium motor
spirit is one major product that have
received much attention on the debate on oil subsidy removal.
The recent subsidy removal on Premium Motor Spirit (PMS), by
the Nigeria’s government seems to contradict its role in the promotion of its
citizen’s wellbeing. Even though, government removed the subsidy with the
intention of promoting investment and output in the oil and other real sector
of the economy. On the other hand, the members of the public are not clear
about its relative effect on the different socio-economic groups. This is
because fuel is strategic to input-cost which can easily diffuse into the
selling prices of most firms and businesses. Critical as fuel is to economic
development, care must be taken to achieve the desired result; otherwise,
nominal prices will have a serious knock-on effect on the total welfare of the
Nigerian citizens. For instance, in year 2001, Nigeria had spent over one
billion and five hundred million(N1,500,000,000.00) to subsidize fuel while in
2002, the amount spent on subsidy was
twenty eight billion, three hundred and four million, eight hundred and
ninety five thousand, eight hundred and
eighty five naira and sixty kobo(N28,304,895,885.60.) Similarly, the amount of
subsidy spent in 2003 amounted to thirty four billion, three hundred and eighty
three million, two hundred and six thousand one hundred and sixty four naira
with a percentage change of 21%(N34,383,206,164) and subsequently fifty one
billion, eighthundred and six million, five hundred and forty four thousand,
five hundred and seventeen naira and
forty four kobo(N51,806,544,517.44).
With a percentage change of 51% in 2004, Eighty six billion, two hundred
and twenty eight million, two hundred and sixty two thousand, eight hundred and
fourteen thousand and seventy seven
kobo (N86,228,262,814.77) in 2005 with a percentage change of 66%, one
hundred and nineteen billion, seven hundred and six one million, four hundred
and ninety two thousand, two hundred and forty six naira (N119,761,492,246.00) with a percentage
change of 83% in 2006, in 2007,two hundred and sixty one billion, one hundred
and five million, three thousand, five hundred and fifty nine naira
(N261,105,003,559) with a percentage change of 118% in 2008, six hundred and
thirty billion, five hundred and seventy million, nine hundred and twenty three
thousand, four hundred and seven naira and forty six kobo
(N630,570,923,407.46). With a percentage change of142% in 2009, six hundred and
seventy three billion, seven million, eighty two thousand, one hundred and
eighty two naira and fifty four kobo N673,007,082,182.54). with a percentage
change of 6.7%,six hundred and seventy three billion, seven million, eighty two
thousand, one hundred and eighty three naira(N673,007,082,183)with a percentage
change of 6.8% in 2010, one trillion, three hundred billion
naira(N1,300,000,000,000) with a percentage change of 93% in 2011. This amount
kept on increasing grossly despite the partial subsidy removal. Hence, the
attempt in this study is to assess the relative effect of subsidy removal on
the welfare of Nigerians.
1.2 STATEMENT OF
THE PROBLEM
The oil sector is one of the most critical sectors to
economic and social development of Nigeria. Adequate oil supply is not only a
strategic input for the national development but it is undoubtedly the most
vital input in transforming the industrial sector for economic growth.
Particularly in Nigeria where oil is the dominant source of revenue
contributing more than 80% of its revenue and 95% of its foreign exchange
income (Business Day Nigeria, 2011).
In the past, government has devoted so much money into the
Nigerian oil sector in form of subsidy to ensure low prices of petroleum
products to its citizens. This subsidized price is expected to have maximum
welfare effect on poor Nigerian. However, the amount of subsidy has been on the
increase in budgets while the expected low prices of petroleum products has
also been increasing with various reforms in the oil sector. Thus, the initial
societal welfare that is the goal of government subsidy in the oil sector is
not being maximized. The problems have been corruption of both government
agencies like the Nigerian National Petroleum Corporation (NNPC), the Petroleum
Product Pricing Regulatory Agency (PPPRA) and firms participating in the oil
sector as marketers. The corruption level can partly be associated with
non-production of oil by Nigerian refineries hence producing below average
capacity and high importation of refined petroleum product. Thus, the social
cost of refining and importing fuel outside the country has outweighed the
social benefit (high subsidized cost to government and high prices of fuel to
the citizens). The above statement is evident by the recent government policy
of deregulation of the sector via subsidy removal on the account that the
subsidy does not reach the targeted citizens.
In addition, over N1
trillion was claimed to have been lost to corruption as revealed by the House
of Representative Probe Panel on subsidy fund Management. The Ad-hoc Committee
findings also revealed the corruption by the NNPC and PPPRA along with 72 other
firms which were to refund N1.07 trillion that was fraudulently paid to some
oil marketers who never made any supply. Hence the real effect of oil subsidy
removal on the well being of Nigerian
citizens need to be ascertained.
1.3 THE RESEARCH
QUESTIONS
The following research questions will serve as an important
guide to the study:
i. What is the
nature and trend of money put aside as subsidy by Nigerian government?
ii. What is the
cost and benefit of subsidy in Nigeria?
iii. What is the welfare implication of its removal of
subsidy on GDP, budget and sect oral allocation?
Iv.How can the effect of subsidy removal be averted?
1.4 THE OBJECTIVE
OF THE RESEARCH
This research is an attempt to investigate the controversy of
government policy of removing fuel subsidy to reinvest the amount in the real
sector and its possible implications on the welfare of its citizens as well as
the economy. In addition, the research will;
i.
To examine the nature and trend of money value set aside as subsidy by
Nigerian government.
ii. To
evaluate the cost and benefit of subsidy in Nigeria.
iii. To
assess the impact of subsidy removal on welfare via its impact on GDP, budget
and sect oral allocation.
1.5 RESEARCH
HYPOTHESIS
The
hypothesis to be tested in this research work, are;
(1)
H0 - There is no
relationship between subsidy and the people’s welfare in Nigeria.
H1- There is
relationship between subsidy and the people’s welfare in Nigeria.
(2)
H0- Subsidy
removal has no significant impact on the welfare of the Nigerian citizens.
H1 - Subsidy
removal has significant impact on the welfare of the Nigerian citizen.
1.6 THE SCOPE AND
LIMITATION OF THE STUDY
The scope of this study is effect of subsidy removal on the
welfare of Nigerians. The study focus only on the subsidy removal which has
been a debate since 1999 till date. The study will in no way delve into serious
political issues as this does not constitute part of the research objectives.
The period to be considered is from year 2001 to 2011. The choice of the period
is to enable the study to examine the implication of subsidy removal on
economic activities of individuals in the society that are likely to be
affected. The study looked at the implication of subsidy removal on budget and
GDP.
1.7 JUSTIFICATION OF THE RESEARCH
The major goal of any economic policy is to achieve optimal
welfare for its populace. This welfare is a broad term that cannot be totally
captured in this study. However, the research will only consider the aspect of
welfare that can be measured in the amount of money spent on consumer goods and
services, as emphasized by Jhingan (2003) that economic welfare is that part of
social welfare which can directly be measured in money. He further stressed
that increase in economic welfare can result into increase in the total welfare
of any society. This study highlights
the cost and benefit of subsidy removal and its welfare implication on
Nigerians.
This research will be relevant to the policy makers. It will
guide them to make quality policy that will serve the best interest of the
general public. Its recommendations will also provide some practical solutions
to subsidy issues in Nigeria and finally, the research is expected to
contribute to the general body of knowledge and further serve as reference
material to future researchers in the field.
.
1.8 CHAPTER ORGANISATION
This project is organized into five chapters; chapter one
introduces the background of the study as well as the research problem,
objective and the significance of the study. Chapter two deals with the
literature review. The review of the relevant literature is further divided
into: conceptual literature which examine the various definitions and meaning
that scholars gave to the term subsidy. Theoretical literature deals with
theory that explain subsidy implication on prices, quantities supply as well as
quantities demanded while empirical literature sited other people’s research
work and findings in similar study.
Chapter three focuses on the research methodology which
outline the method adopted in the research. Chapter four is concerned with the
data analysis, presentation and the interpretation of the result using the
method specify in chapter three. Finally chapter five contains the summary,
recommendations as well as the conclusions of the study.
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