I officially have a hypothesis and that is – whenever a low-income economy inaugurates a social intervention programme, it will be extremely difficult to oust the same programme when it becomes unsustainable. Subsidies are the reduction in the final price of essential goods and services to consumers, typically borne by the government. Are subsidies really good or bad? In economic theory, subsidies, which are basically negative taxes, are inefficient. This is because they reduce the optimal level of production and consumption in the society.
Nigerians love subsidy, but the reason is not far-fetched. When you place an ant in a bowl of sugar, it is near-impossible to get it out of there. Let me correct a misconception that subsidy helps to alleviate poverty and inflation. This only applies for goods and services that are supplied by the government, not the private sector. Subsidizing a product that is heavily supplied is creating more demand, which renders the impact a zero-sum. I like to place subsidies in Nigeria in three classes – fuel subsidy, electricity subsidy and interest rate subsidy. All three subsidies may be removed in 2022 based on recent development in the fiscal space. However, this would come at the cost of a public uproar and protest.
Do we really need to sustain the current subsidies or introduce more subsidies? I don’t think so and I will provide three justifications for my claim. First, subsidies are broadly proven to be an instrument applied by low-income economies. Most developed economies do not promote subsidies because it affect the revenue of the government and their ability to undertake infrastructural project, which drives economic growth. In fact, developed economies tax their citizens and use the proceeds productively for the common good. Subsidies are really expensive because significant cash flows are lost. Nigeria spends about N150bn every month to fund subsidies. In four years, this comes to N7.20 trillion, which will completely fund the 2022 budget deficit of N6.39 trillion.
We also don’t need subsidy because most services that are subsidized have performed poorly. In this light, I make reference to public education, public health and electricity. I understand that the essence of subsidizing these services is to enable affordability by poor Nigerians, but the reality is that the model does not work for us. There are public high schools and colleges in the United States and they perform better than their private counterparts, but the reverse applies in Nigeria. The reason is because the public institutions in the U.S., and in most developed countries by the way, get significant funding from the government that keeps them competitive. While Nigeria is also subsidizing these services, the government is not funding these institutions. If existing subsidies are not productive, why clamor for more?
To my final point, the private sector is the biggest contributor of growth in Nigeria. If you doubt this, examine the top three sectors in Nigeria’s GDP structure, both in terms of growth and contribution to GDP. Your analysis will pit telecommunications, FMCGs, and crop production as the sectors responsible for the periods of sustained growth in the economy. These sectors are predominantly private sector-driven and the private sector do not do well with subsidies. When you connect the dots, you would conclude that subsidies has limited the growth of sectors with a heavy presence of the public sector. Scrapping subsidies will not only attract new private sector participants, it will sustain the lives of existing ones.
Let me conclude on this note, we all must understand that nothing good comes easy. Most developed economies at some point in their economic history sacrificed the wellbeing of its citizen to drive growth. Subsidies are expensive and they are capable of hindering growth in low-income economies, which are devoid of the ability to fund public services. Therefore, we don’t need more subsidies and existing ones have to be gradually removed. My emphasis on the phrase ‘gradually’. I believe we will all be better off from its removal.
Written by Michael Ogunremi
Picture credit – Unsplash