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The Project File Details
Nigeria, like other oil exporting countries in the world has embarked on the policy of gradual removal of fuel subsidies since 1970s. However, this issue has become highly contentious in recent time due to the incessant nature and the effects on the economy. To this end this research work is set to examine the impact of fuel subsidy removal on transport sector in Nigeria using the Ordinary Least Square (OLS) estimator. The result showed that fuel subsidy removal had a positive and significant relationship with transport sector which implies that removing gasoline subsidies will contribute to the growth of the transport sector within period under study. This agrees with the view of government that the removal of fuel subsidy will lead to job creation and freeing of funds needed by the government for developmental project in various sector of the economy of which the transport sector is inclusive.
1.1 Background of the Study
Nigeria is Africa’s biggest number one producer and the 13th largest producer of oil in the world with daily production reading about 2.4 million barrels. Nigeria also has the second largest proven oil reserves in Africa and 10th largest in the world. The petroleum industry has been played by massive corruption, militancy, oil spill and oil played theft but it remains the major exports and biggest source of foreign earning for Nigeria. (Africanvault, 2016).With an estimated 37.2 billion barrels of proven oil reserves, Nigeria is one of the world largest oil producer.
Before the discovery of oil, agriculture was the dominant sector of the Nigerian economy. Agriculture provided the foreign exchange that was used in importing raw materials and capital goods. The proportion of GDP accounted by agriculture was 67.0% and petroleum accounted for 0.6% with this, the various marketing boards generated much revenue that was used by government to develop the basic infrastructure needed for long term development of the country (CBN Bulletin, 2008)
The benefits of fuel subsidy to the average Nigerian was short lived. The federal government claim to have spent over 1.4 trillion on fuel subsidy in the past five years. It also claimed to be paying heavily to subsidize kerosene which is imported into the country through the Nigerian national petroleum corporation (NNPC), the fuel subsidy policy has also bred several unintended consequences and practices such as smuggling of petroleum products out of the country, the federal government also claimed that the fuel subsidy policy has made them unable to tackle problems of our collective infrastructure which are the roads, power, agriculture, fixing other refineries etc. (Omoniji, 2012).
However, the countries mineral riches have not resulted in a significant improvement in the quality of life for the majority of Nigeria citizens. In 2010 54% of homes live below the national poverty line and Nigeria earn 4.6 trillion naira from oil exports. Therefore, Nigeria does not lack the resources to reach its development goals rather its resources have been utilized inefficiently (Moyo and Songwe 2012).
Despite the countries rich oil reserve and the huge revenue it reserves from the sales of its petroleum product, the country increasingly depend on imported petroleum product because the existing refineries are producing below 20% of their installed capacity. In fact, the cost of importing petroleum product have risen so rapidly in recent years that the countries capital expenditures and balance of payment are under threat (Adelabu, 2012).
Nigeria has four refineries, two in Port Harcourt, one in Warri and another in Kaduna, with a combined installed capacity to produce about 445,000 barrels per day yet it can’t be achieve because the country has recently seen a rise in militant attacks in its main oil producing region, the Niger Delta, donating oil production, this makes the country a net importer of fuel, and the federal government spends huge sums of money on fuel subsidies in other to provide the product to the citizen at an affordable rate. In 2011 alone Nigeria’s fuel subsidy cost the country an estimated 8 billion dollars and price tag for 2012 was expected to even greater, this does not take into account the countries loses due to market distortion as a result of the subsidy (Moro, and Songwe 2012).
Four years ago, the Goodluck Jonathan administration made a decision to end the costly fuel subsidy that many believed was fuelling corruption in Nigeria. The decision was based on the belief that the subsidy was a drawn on public finance and that it was unsustainable in the long term. The formal president said the move would save the treasury over 1 trillion Naira in 2012 and that their money saved would be better spent on infrastructure development in the country. But Nigeria’s cried foul, protests, some of them violent, erupted in different states across the country as people asked for a reinstatement of the fuel price. President Buhari’s government announced the removal of the subsidy for the sale of premium motor spirit this moves the price of fuel in Nigeria from N97 to 145 per litre.
The removal of fuel subsidy according to the federal government is to enable it utilize the fund it will realize from the new policy to develop other sectors of the economy. It is too early to tell whether the Nigerian government will succeed in these efforts but after 20 years of dogging the issues and trillions of naira spent. The removal of fuel subsidy should be supported. If successfully implemented, creates the space for Nigeria to finally develop refinery capacity and consequently increase its potential revenue from the oil sector and create jobs. Nigerians are disappointed that despite their disapproval of the plan, government has remained adamant.
One sector of the economy adversely affected by the fuel subsidy removal is the transportation sector; transportation cost has gone up by more than 100% (Olatunji, 2012). This increase in transportation cost has been transmitted to other aspect of the economy that depends on road transportation means. According to a report, (Olatunji et al, 2016) a bag of rice that is sold about N7,500 now sells for 24,000. The cost of a basket of tomatoes rose from N9,000 toN20,000. The sellers especially attributed the increase to high cost of transportation fares.
It is against this backdrop that this work will be concerned and embarked upon to carefully examine the effect removal of fuel subsidy will have on the growth of transportation sector in Nigeria and its contribution to the GDP and by extension on the entire economy.
1.2 Statement of the Problem
The removal of fuel subsidy in Nigeria will no doubt have an adverse effect on the transportation sector and by extension, the entire economy of the country. This is because virtually all small and medium scale enterprises depend on road transport to move their goods and services.
The movement of food items/production depends on transportation. Therefore, food price will certainly hit roof top. It is as a result of this that the federal government needs to carefully seek ways to implement removal of fuel subsidy so as to ensure that its citizens are not worse-off. The development of alternative means of transport such as railway and water transportation which has hitherto remained abandoned should also become a top priority. With the repair and possible, the construction of new refineries have become absolutely necessary if the country must achieve its development goals and objectives. (Omokhodion 2013)
The problem of fuel subsidy in Nigeria is as a result of the inefficient functioning of the existing refineries which makes it impossible for the country to meet its local demand for petroleum because it has to depend on imported ones, which necessitates the payment of subsidy to keep the cost as low as possible in the country for the consumers. Such a situation does not help an economy that wants to grow. The government needs to come up with policies that are capable of solving this problem.
The immediate past administration, Jonathan’s administration began a public-private-partnership (PPP) with the Dangote group to build a new refinery. The 500,000 barrel per day refinery project is expected to begin operation by the year 2018 (Meze, 2015). It is therefore left to be seen whether these efforts will be carried out successfully in order to end the present economic challenges the country faces due to the issue of subsidy on petroleum products. It was this problems that prompted this study on the impact of fuel subsidy removal on transportation sector in Nigeria economy.
1.3 Research Questions
This study intend to provide answers to the following research questions
1.4 Objectives of the Study
The objectives of this research are well defined to enable the researcher arrive at a logical conclusion, and they are given below:
1.5 Research Hypothesis
1.6 Significance of the Study
This study will be very useful to the government and stakeholders to be able to adopt a bottom up approach that will be beneficial to Nigeria including the poor masses and the elites.
The result of the study will also be useful to Nigerian citizens as they will comprehend and be enlightened on the usefulness of fuel subsidy removal. The study will also be useful to students, staff and researchers looking for reference materials on fuel subsidy removal on transportation sector. The public, private sectors and public affairs analyst will learn a lot from this research work.
1.7 Scope of the Study
The geographical scope of this work will be centered on the Nigerian economy with particular emphasis on the oil sector from 1981-2016. The oil sector under study will be the aspect that deals with consumption fuel price and fuel price subsidy in the Nigeria.
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