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After several starts and stops, the Nigerian government has finally removed fuel subsidies, resulting in an overnight price hike of 67 percent. The economic logic of subsidy reform is clear. Fuel subsidies were costing the government about $5 billion per year while the benefits accrued mostly to the non-poor. Nigeria’s particular scheme was also riven with corruption; a 2012 parliamentary inquiry found that the government was paying daily subsides on 59 million liters even when consumption was only 35 million liters. In recent weeks, the country was further hit by debilitating fuel shortages.

Politically, however, the subsidy was generally popular, in part because many citizens saw cheap fuel as one of the only tangible benefits from the state. For that reason, the January 2012 attempt at subsidy reform sparked riots and a partial policy reversal. This time, there are some indications that labor unions may protest again, but we’ll have to see whether opposition gains momentum and how President Buhari responds.

What’s notable, and potentially problematic, is that the government is planning to use any savings from lifting the fuel subsidy in the regular budget. Nigeria could have instead learned lessons from places like India and Iran, which each replaced a costly, poorly-targeted subsidy with a targeted cash payment. In Iran, fuel subsidy removal was preceded by deposits into tens of millions of bank accounts, some of them created especially for this purpose, which created pro-reform political momentum.

India suffered from the same market failures in cooking gas canister distribution as Nigeria’s petroleum sector, leading to gross misallocation and mistargeting of subsidies for decades. After a few false starts, the government rolled out the subsidy reform in 2015 as part of a broader policy to move towards direct benefit transfer, leveraging universal biometric ID and financial inclusion as the new pipeline for delivery. India’s LPG gas canister reform is now the world’s largest cash transfer scheme at 150 million beneficiaries, and has had an estimated 24 percent budget savings.

Could Nigeria launch a national cash transfer scheme in lieu of fuel subsidies? Back in 2012, Todd proposed a 20-20-20 scheme to provide the equivalent of US$0.20 per day to all Nigerians under the age of 20 using a set-aside of 20 percent of government revenue. In Nigeria’s current fiscal environment, this might be tougher to achieve. But using subsidy reform to build a national ID and transfer system would have lots of knock-on benefits, including on other public services, voting, and eventually taxation. Moreover, for a President who has prided himself on anti-corruption, such a system could weed out scams and bolster the integrity of the state.

India’s experience replacing an in-kind subsidy with a cash transfer shows that energy subsidy reform is very much possible, and that efficiencies can even be popular. And that sometimes it’s better to build a new pipeline than to constantly try to fix the leaks. 

Disclaimer

CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.