Since the Nigerian government has removed fuel subsidies, it seems that it has been able to save enough money to divert these funds into investments. According to Business Insider Africa, the government of Nigeria will save 8 trillion Naira from fuel subsidy removal and foreign exchange reform.
The disclosure came from Taiwo Oyedele, the chairman of the Presidential Fiscal Policy and Tax Reforms Committee, during a panel session at the Lagos Chamber of Commerce and Industry’s 2024 Economic Outlook and Budget Analysis.
In June, the Tinubu administration floated the naira to allow banks and other forex market actors to trade the currency freely. In just four months following the removal, the Nigerian government reported a savings of 1.45 trillion naira.
When subsidies are removed, the government no longer has to allocate funds to artificially lower the price of goods or services. This can be significant, especially for large or inefficient subsidies. As for the case of Nigeria, removing fuel subsidies can free up billions of dollars that were previously used to keep gasoline prices artificially low.
The Tinubu administration removed these fuel subsidies to increase tax revenue. Indeed, removing subsidies can actually lead to increased tax revenue. This can happen if the money saved from the subsidy is used to reduce taxes, leading to higher economic activity and more tax collection. Additionally, if the subsidized activity becomes more efficient after the subsidy is removed, it may generate more tax revenue.
By removing these subsidies, the Nigerian government is trying to improve the allocation of public resources. By freeing up resources from inefficient subsidies, the government can invest these 8 trillion naira in more productive areas that it deems necessary such as education, healthcare, or infrastructure. This can lead to economic growth and improve the lives of citizens, which can indirectly save the government money in the long run.
The removal of the fuel subsidies has impacted Nigerian consumers, however. It has increased the price of gasoline. An increased price of gasoline can create economic hardships for consumers, especially for those with low incomes. This is part of the reason why inflation has been persisting in Nigeria.
It important to stress that subsidies removal have harsh effects at first. This is because consumers have to adjust their behaviors to the removal once it is in effect. And those who have not prepared for it feel the pain of the price increase that occurs once this removal is enforced. However, in the long-term, when once consumers have adjusted their behaviors to the level of fuel supply, then fuel prices will be more balanced.