The Nigerian government has said it will stop paying for fuel subsidies after June 2023. This policy change will have a significant impact on businesses operating in the country, especially supply chains. Halting subsidies will inevitably lead to higher transportation and energy costs, forcing manufacturers and distributors to raise prices. It could lead to decreased demand and reduced sales, hurting economic growth. But it’s not the end of the world. In fact, in the long term, this can be a net positive for the economy if handled right.
Fuel subsidies are not a bad idea in themselves. They serve to stimulate economic activity and protect domestic industries by reducing their energy costs. This is typically achieved by the government directly or indirectly providing financial support to reduce the price of fuel. But it can also lead to waste and corruption, as is the case in Nigeria. Between 2017 and 2021, the Economic and Financial Crimes Commission (EFCC) recovered approximately N13 billion as proceeds from illegal payments made under the subsidy regime.
While removing petrol subsidies is a painful prescription, it can help shore up government finances, assure marketers that they can invest and recoup their earnings in a free market, and ensure that businesses can access fuel products essential for their operations and survival.
One of the main objections to fuel subsidy removal is a lack of trust that the government will judiciously allocate the recouped gains to improve the economy. Critics point to the high cost of governance and the dilapidated state of public infrastructure. For businesses, the non-functioning state of the nation’s oil refineries makes them even more vulnerable to the unpredictability of global supply chains as Nigerian imports virtually all its refined petroleum products.
In removing subsidies, the government must acknowledge these criticisms and work to address them. How, for example, can the government reduce overhead costs in public administration? A comprehensive plan on how subsidy gains will be reinvested into the economy must be created and effectively communicated to the public; countries such as Ghana and Indonesia embarked on extensive public relations campaigns to educate their people on fossil-fuel subsidy reform before pulling the plug.
The federal government has said it plans to revive the nation’s oil refineries. However, putting them on a path to privatisation might be its best option to conserve public funds. The government is also heavily invested in the Dangote Oil Refinery, which is expected to be the largest in Africa and is scheduled to begin operations in 2023. If Nigeria can refine its own oil, the government will be better able to protect businesses in a system where prices are set by the market.
Buoying supply chains
One of the major pain points for players in the supply chain is the decrepit state of public transport infrastructure in Nigeria. Take, for example, the congestion at the Apapa port in Lagos. In 2020, the Financial Times reported that trucking a container from the port to the mainland, which is just about 20 km, cost about $4,000, almost the same as shipping one container from China to Nigeria.
A sustainable future
When subsidies are taken away, the money saved can be used to build better ports, roads, bridges, and train networks. This will help reduce the running cost for businesses within supply chains – manufacturers, suppliers, wholesale distributors, and logistics service providers.
Energy is another thorn in the flesh of supply chain businesses. Due to frequent power cuts, many businesses rely on petrol and diesel generators for energy supply. In 2022, according to the National Bureau of Statistics, the price of diesel surged by 184 percent, raising the cost of doing business. And for several months, Nigerians have endured long queues to purchase petrol. The government can provide subsidies for businesses that invest in fuel-efficient and alternative sources of energy generation.
A less often cited benefit of fuel subsidy reform is that it can boost the transition to cleaner sources of energy, helping supply chain businesses improve their sustainability practices. Businesses that pay N169 for petrol are less likely to think of investing in solar technology. But as fuel prices rise in the absence of subsidies, the business cases for solar and wind power begin to make sense.
It will accelerate the existence of businesses such as ColdHubs, which instals 100% solar-powered walk-in cold storage rooms at Nigerian markets to help farmers and vendors cut down on spoilage and increase profits. ColdHubs currently serves thousands of users and their hubs have saved tons of food from spoilage, increased user income, and created new jobs for women.
By incorporating sustainable practices, supply chain businesses can assure consumers and investors that they care about the impact of their operations on the environment and even improve the resilience of their supply chains.
Between the global supply chain crisis brought on by COVID-19 and the geopolitics of the Russia-Ukraine war, the year 2022 was a tough one for supply chains, not just in Nigeria but across the world. And the effects of these events continue to be felt into 2023. History teaches us that the economies that do well during hard times are those that plan ahead. Nigeria must begin to plan for the removal of fuel subsidies today.
Subsidy removal is not an easy decision, but it has the potential to supercharge the economy if it’s done in a phased, responsible manner.
Nkiru Amadi-Emina is the CEO of Pivo Africa.