Challenges of policy-making failures: Impact of fuel subsidy removal

Policymaking is a process of decision making on how a problem encountered in any society can be solved. It entails the formulation, adoption and implementation of decisions in other for a problem to be solved. Also it aims at changing future situations to make them better than the present. Effective policy making ensures that any nation grows and does favourably. On the other hand, Policy failures is the adverse effects of any poor policy to an economy, societies and parliament.

Any policy decision can fail to yield good result to any nation. One of the policies that made Nigeria ever since 2020 popular, has to do with the removal of treashol petrol. This article is all about policy making failures, the case scenario here to be discussed is the impact of fuel subsidy removal in Nigeria.

Background
Nigeria has a decades-long policy of subsidising fuel, as it aims to keep the price low to shield the population from the volatility of global Oil prices, and help economic soundness. Especially because of the negative economic effects associated with it and concerns of fiscal deficits, the Federal government decided to remove fuel subsidies in 2023.

Economic challenges
The removal of fuel subsidies in Nigeria has led to several economic challenges including:
Financial Obligation: The cost of maintaining the transport fuels subsidies put intense strain on the national budget as the government spent vast sums of money on this every year. It overshadowed the budget to the extent that government barely managed to allocate sufficient monies to the health and education sub-sector.

Economic perversion: Fuel subsidies perverted the economy by providing an artificial fuel price which largely benefited the elite, and gas smugglers rather than going to the greater population as intended.

Inflation: The sudden removal of the fuel subsidies caused a sudden surge in fuel prices, leading to inflation. Transportation and goods became far more expensive, putting additional stress on households and businesses.

Impact on SMEs: Small and medium scale enterprises were really hit by this sudden increased in fuel. Most of the SMEs base their activities in fuel and the sudden increased fuel price had eaten into their profits and sustainability.

Social challenges
The social impact of fuel subsidy removal has been profound:
Public disapproval: There was widespread dissatisfaction at the manner in which the removal of the subsidy was effected – at what public scholars referred to as short-changing the public in the palaver of reform.

Poverty and inequality: The poor, who are in the greatest need of subsidised fuel, saw the removal of subsidies hit them hardest. The resulting exacerbation of poverty and inequality in the country highlights the folly of the move.

Protest riots and Unrest: Because citizens were hit hard by the removal of subsides they protested and rioted on the streets. Unions and citizens went on marches and demanded the reinstatement of subsidies.

Political challenges
The political ramifications of the policy decision were significant:
Trust Failure. Many Nigerians believed the government had not provided them with an opportunity to disagree with the decision to remove subsidies. ‘It was a trust failure at the highest level,’ Coker said.

Corruption and mismanagement: the administration of fuel-subsidy programmes has long been dogged by corruption and mismanagement, removing subsidies brought all of this to the forefront and raised the demand for greater transparency and accountability.

Policy implementation: Effective and transparent implementation of policy proved difficult. The government faced challenges in bringing about the positive impact of removing the subsidy and mitigating its negative impact.

Case studies and Examples
Smuggling and arbitrage: Fuel subsidies incentivised smuggling and arbitrage where smugglers resold subsidised fuel in neighbouring countries at a higher price and grabbed the profits. By removing subsidies, these illegal activities were discouraged.

Comparative analysis: Other countries that have reduced or removed fuel subsidies (eg, Indonesia and Egypt) have been forced to confront similar pitfalls. Yet they have also given us glimpses into how to smooth the political and economic roads toward such a transition.

Lessons learned
Gradual approach: Since the cost to citizens, businesses, local, state and federal government would rise, the policy changes should be gradually implemented over a long period of time to allow for a smoother transition to meet the targets set. An example of this is phasing out subsidies over time so the shock is not all at once but distributed over years.

Stakeholder engagement: Inviting stakeholders into the policy-making process can facilitate the implementation of the new standards and nurture public trust in the policies. Conducting dialogue with the labour community and with businesses will improve the chances of policy success, as will seeking input from other relevant stakeholders in public discourse.

Transparency and accountability: Transparency and accountability in policy implementation is needed to minimise possible corruption and mismanagement. An open system of communication and monitoring mechanisms should be in place to ensure public acceptance and for impact.

Policy alternatives to fuel subsidy removal
Gradual phasing out of subsidies:
Fuel subsidy removal can be phased out in a manner that minimises the shock and inflationary pressures associated with a sudden removal. Instead of implementing an immediate and large cut, subsidies can be reduced on a piecemeal basis over time to help the economy and population adjust. For example, the government could announce a clear and well-publicised schedule for phasing out subsidy reductions, giving firms and households forward visibilility to plan and adapt.

Targeted subsidies
Targeted subsidies recognise the capacity constraints of the poor, who will often leave subsidised goods and services to patronise market prices. Targeted subsidies are investments that are oriented towards the most vulnerable, elevating support for those who need it the most – low-income households, users of public transport, essential workers, etc. These subsidies can be implemented through cash transfers, vouchers or subsidies for goods and services.

Compensation mechanisms
Compensating mechanisms would therefore be key, for instance cash transfers directly to low-income households, social welfare programmes and subsides for basic foods and services. The government could for instance transfer cash on a monthly basis to all households to compensate them for the increased cost of living resulting from the removal of the subsidy for fuels.

To be continued tomorrow.

Dr Oluwadele is an Author, Chartered Accountant and Public Policy Scholar based in Canada. He c an be reached via: [email protected]