This is a joint post with Stephanie Majerowicz.
Last Sunday the government of Nigeria scrapped fuel subsidies, leading to an immediate doubling of petrol prices. This set off violent protests across the country, threats of strikes by trade unions, and was even lamented by western pundits as a sign of government indifference to the poor. Economists of course view the move as a valiant step toward fixing a deeply dysfunctional budget system. Fuel subsidies were (directly and indirectly) draining the treasury, at a cost of up to US$8bn per year, equivalent to over 25% of the federal budget.
The rub will be if the government can make the case that there’s a better way to spend its resources than through fuel subsidies. Nigerian protesters could be forgiven for being skeptical. Many see cheap gas as the only tangible benefit from their country’s vast oil wealth.
But fuel subsidies are a terrible way to share benefits, especially with the poor. Usually such subsidies are regressive, disproportionately benefitting the middle class and elites who can afford private cars and generators. In Venezuela 80% of gasoline goes to fuel the private vehicles that drive around the top 20% of the citizens. Subsidies are also distortionary, fuelling high domestic consumption and diverting funds from other uses (teacher salaries or better roads, anyone?).
Nigeria’s dilemma isn’t unique. Most oil-exporters subsidize their fuel prices domestically, some at ridiculously low prices—and thus at an exorbitant cost to government coffers.
Source: The Atlantic, May 2011.
But if oil-rich countries are looking to repeal subsidies—and they should—they also need to make a credible case that what comes next is better—or risk political backlash. Iran recently scaled back its gasoline subsidies and replaced them with cash transfers on the idea that the shift would be both cheaper and better targeted at the poor. India too is replacing various cooking fuel and other basic commodity subsidies with cash payments. While there may be reasons a national cash transfer system might not work in parts of Nigeria (PDF), going back to inefficient fuel subsidies would be a big mistake for Nigeria—and for the majority of Nigerians. Nigerians shouldn’t mourn the loss of fuel subsidies. They absolutely should demand an answer to what’s next.