- The Nigerian government has announced the termination of fuel and foreign exchange subsidies, marking a significant policy change
- Minister Wale Edun stated that the subsidies had drained over N10 trillion from the economy, equivalent to 5% of Nigeria's Gross Domestic Product
- Inflation and uncertainty for businesses and investors are anticipated following the subsidy removal, but stabilisation is expected as the market adjusts
In a significant move, President Bola Tinubu's government has formally announced the elimination of fuel and foreign exchange subsidies, bringing an end to the long-disputed policy.
Wale Edun, the Minister of Finance and Coordinating Minister of the Economy, announced on Thursday, October 17, during the World Bank’s Nigeria Development Update in Abuja, that both subsidies have been fully eliminated.
First removal of fuel, FX subsidies in 40 years
For the first time in 40 years, the vexed issue of fuel subsidy and linked to it, the foreign exchange subsidy, costing 5 per cent of GDP has gone,” Edun stated.
The minister recognised the challenges and hardships these bold reforms might cause but stressed that the long-term benefits for the country outweigh the short-term discomfort.
According to him, the subsidies had taken a heavy toll on the economy, costing the nation more than N10 trillion, which represents five per cent of its Gross Domestic Product (GDP).
Edun discusses timeline for subsidy reforms
Edun further said, It takes time to do reform. So what started on May 29, 2023, taken from one place, tried to re-exit in another place, and it was finally extinguished.
“We have market pricing of PMS and with that, there’s huge benefit not only to NNPC, which was bearing the brunt but to the economy as a whole, including the state governments and the local governments.
“In the same regard, market pricing of foreign exchange. And it’s a difficult step, apart from all the other things that you do to ameliorate the pain generally of macroeconomic reform.
“In this case, we sat down with the unions yesterday. We explained the economic trajectory the country was on, and we explained the opportunity which we all needed to ensure that we do not miss.
“Continuing inflation, getting the economy growing again, repairing a trillion’s hole. I mean, you can work out the figure yourself.
“When you lose 5% of GDP, I think Dr. Ogeo said it all the other day. But if you imagine that we now have those funds back each month, each day, with market pricing of PMS, the government has money at the federal, state, and private levels, and local government levels, for housing, for infrastructure.
“It is a very, very significant point and it’s President Bola Tinubu that has been able to do what was there for 40 years,” Edun stated.
What does fuel, foreign exchange subsidy removal mean for Nigerians?
TheRadar compiled the implications of the fuel and foreign exchange subsidy removal below:
1. High cost of imports
With the FX subsidy gone, businesses that depended on affordable foreign currency for their imports will now have to buy dollars at more expensive rates. This shift could result in higher prices for imported goods, leading to short-term inflation as the increased costs are passed on to consumers.
2. Higher fuel prices
Without the fuel subsidy, petrol prices will rise, directly affecting transportation costs. This, in turn, will likely drive up the cost of goods and services across various sectors, as businesses factor in higher logistics expenses.
3. Inflation
With the end of the FX subsidy, inflation may rise as the cost of imported goods, which make up a large portion of Nigeria's consumer market, becomes more expensive. This could directly impact the cost of living for the average Nigerian.
4. Uncertainty for businesses and investors
The subsidy removal could cause uncertainty for businesses and investors, however, the market is expected to stabilise as it adapts to the new structure.
5. Increased cost of living
Both higher fuel costs and inflation will likely elevate the cost of living for the average Nigerian, stretching household incomes and potentially exacerbating poverty in the short term.
6. Promotion of local production
The higher FX costs may motivate Nigerians to reduce dependency on foreign goods and encourage economic growth. Companies could shift their attention to local production instead of importing, potentially fueling the growth of domestic industries.
“Bring evidence”: Nigerians react over Tinubu’s claims of economic progress
Meanwhile, TheRadar earlier reported that President Tinubu claimed significant progress in economic reforms at the 30th Nigerian Economic Summit.
Numerous Nigerians reacted saying they disagreed with the President's claims.