AN EMPIRICAL STUDY OF PETROLEUM SUBSIDY REMOVAL ON NIGERIA’S ECONOMY

By | June 26, 2016
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1Ukeyima Nicholas Pever

2Dominic I. Ukura

1Registry Department

Akperan Orshi College of Agriculture, Yandev –Gboko

Benue State

 pukeyima@gmail.com

2Department of Business Administration And Management

Akperan Orshi College of Agriculture, Yandev-Gboko Benue State

ukuradom@gmail.com

 

 

Abstract

One of the contentious issues in contemporary Nigeria is the removal of fuel subsidy on Premium Motor Spirit (PMS). The purpose of this work is to evaluate the arguments for and against subsidy removal. An empirical investigation of the impact of the fuel subsidy removal on fuel consumption was conducted using percentages and chi-square methods. Four hypotheses were stated and tested. The result of the study shows that subsidy removal has no economic benefits, but rather, leads to increase in the prices of goods and services in Nigeria. However, the study also shows that there are weak and non-transparent institutional frameworks, which cause citizens’ lack of credibility and trust in government. The study therefore recommends the maintenance of the fuel subsidy to firms to enhance high productivity and low prices of petroleum products for the well-being of the Nigerian populace.

 

 

 

Introduction

 

On 1st January, 2012 the Federal Government of Nigeria through the Petroleum Products Pricing and Regulatory Agency (PPPRA) announced the total removal of subsidy on the Premium Motor Spirit (PMS). This immediately led to an increase in the pump prices of PMS from N65 per litre to between N138 official price and N140 commercial price (Adeleke & Gafar, 2012). The increase in prices of PMS in turn led to exorbitant increase (more than double) in transport fares and prices of many market goods. All these ignited debates, strike actions and protests nation-wide.

The debates raised a number of issues such as, the concept of subsidy itself, who gains and who loses from the removal, and political economy issues such as corruption in the oil industry, wasteful spending of government, credibility, trusty and sincerity of government.

This article examines the concept of subsidy and its removal using basic economic tools of demand and supply, the expected gains of subsidy removal, subsidy consumers’ choice, subsidy and government spending as well as subsidy and the “cabal”. The gap in knowledge that needs to be filled is by answering the fundamental questions of who gains and who loses form the subsidy removal? Why and how fuel is subsidized in Nigeria? Would there be macro economic gains? Would subsidy removal ensure market competition and efficiency? And so on.

From the government perspective, withdrawal of government subsidy to firms is one of the surest routes to the elimination of price distortion. It was further contended that the removal of petroleum subsidy would have the potential of bailing out a cash-trapped economy by generating additional 6.8 million naira for the country yearly (Anyamwu, 1993). In addition, it was argued that the withdrawal of petroleum subsidy would effectively halt illegal bunkering, check smuggling as well as the adulteration of kerosene and other petroleum products.

The idea of subsidy removal on petroleum resources in Nigeria began during the administration of General Ibrahim Badamosi Babangida (Ekpe, 2003). The Nigerian state under Babangida in 1986 initiated the process of withdrawal of Petroleum subsidy by announcing the withdrawal of the pump price of the product, which rose to an alarming rate. For instance, the price of gasoline and diesel which stood at 20 kobo and 11 kobo per litre in 1985, were raised to 39.5 kobo and 29.5 kobo in 1986. This represented an increase of 97.5 percent and 168.2 percent, respectively.

The Nigerian state still has implicit confidence in the subsidy removal as a means of restoring economic viability as illustrated by the Obasanjo and Jonathan regimes recent decisions to abolish government subsidy on domestic fuel sales and to hike the price cap on petrol by 54 percent. This article therefore, has attempted to analyze the impact of the withdrawal of petroleum subsidy on Nigeria’s economy.

Theoretical Framework

The growth theoretical construct has been adopted as theoretical framework for this discourse. This paradigm holds that Third World underdevelopment is primarily triggered off due to faulty and inappropriate policy prescriptions by the West and their assistant agencies in Third Wordl countries.

In the 1950s and 1960s, orthodox development theories which attempted to offer solutions to the perennial poverty in developing countries recommended balanced growth strategies (Nurkse, 1953), the unbalanced growth theory (Hirschman, 1958) and the import substitution strategy as solutions to overcoming poverty. When these strategies failed to alleviate poverty or eradicate backwardness, “direct government intervention through planning, control, protection as well as regulation of economic activities” were offered as a way forward (Tomori, 1995).

In addition to this argument, what makes economic development elusive to the Third World is that their policies for economic development are not only externally oriented, but are also implemented by local political elites who are bankrupt of viable alternative development paths. As Todaro (1977) puts it:

Having little or no really useful knowledge to enable them to come to grips in an effective way with real development problems, they often tend to become unknowing or reluctant apologists for the existing system of elitist policies and institutional structures (Todaro 1977:92).

The explanation for this kind of situation is due to inherent structural dependence. This creates among the political and bureaucratic elite a pervasive mentality that is based on their assumed powerlessness to achieve socio-economic growth without external investment and technical assistance (Ekpe, 2003). There is however broad support in virtually all empirical studies for a strong positive impact on economic growth by the investment rate and by various measures of human capital. Various kinds of public policy variables also seem to make a difference on the growth rates. Countries with relatively open economies have tended to maintain higher growth rates than countries with more restrictive policies.

Some of the most emotion-laden and ideologically tinged debates on economic growth theory deal with two questions on which no broad consensus seem likely in the near future- what sort of mixture of government planning and control versus the free market is most conducive to economic growth? What are the effects of different cultures on promoting or retarding economic growth?

Scholars like Adam Smith, David Ricardo, Thomas Malthus and many others (even Karl Marx) laid great stress on the importance of growth theory based on culturally conditioned values or attitudes (Igwe, 2012).

Although these have been little efforts to empirically verify the major assumptions of this perspective, the fact remains that its explanatory potential is not in doubt (Ekpe, 2002). This theoretical model is useful because it would provide us with concise analytical tools with which to examine the impact of the withdrawal of petroleum subsidy on Nigeria’s economy.

Hypotheses

In specific terms, the study intends to test the following hypotheses:

  1. The greater the withdrawal of petroleum subsidy, the greater the availability of disposable income for development.
  2. The greater the removal of petroleum subsidy, the greater the capacity of the economy to generate employment opportunities.
  3. The greater the withdrawal of petroleum subsidy, the greater the growth rate of the national economy.
  4. The greater the withdrawal of petroleum subsidy, the greater the extent to which external and internal debts are serviced.

Having specified the research focus, the next line of action as Babbie (1979) puts it “is to determine the best way to find it out”. In accordance with this research dictate, a statistical analysis which is based on questionnaire is adopted. Accordingly, a questionnaire that would elicit respondents’ views on specific items relating to the four hypotheses was formulated and administered.

 

Sampling Method

This study adopted a stratified sampling method. In order to obtain useful information for this research the population of 500 is to be divided into five strata of 100 respondents. The five strata comprise of lecturers, bankers, civil servants, politicians and top bureaucrats. The nominal roll of these establishments (higher institutions, and banks within Gboko town of Benue State, Nigeria as well as politicians) was used to select the respondents whose views helped in this inquiry.

Data Collection Method

The data for this research was drawn from the primary source. Accordingly, a population of 500 respondents was randomly chosen. The questionnaire was prepared and distributed to the population of 500 literate respondents who are currently serving as lecturers, bureaucrats, bankers, top ranking politicians and the like with a bias to economics, sociology and politics. Respondents were expected to strongly agree, agree, strongly disagree or to be undecided (Likert Scaling) to the questions raised in the questionnaire.

Method of Data Analysis

A frequency count of all the responses derived from each specific question relating to the hypothesis was made. The responses were tallied under the following headings: (a) Strongly agree (b) Agree (c) Strongly Disagree (d) Disagree (e) Undecided. This was followed by a scientific analysis.

The chi-square (x2) method was used in explaining the questionnaire. The questionnaire scale which is based on the various research hypotheses was then applied. This was followed by the chi-square test that attempted a comparison between the obtained and observed samples frequencies. The chi-square test deals with the application of data that are not on a continuous scale of measurement. It is denoted by the symbol (x2 ) and the formula for computing chi-square (x2 ) is as follows:

x2 = a(fo – fe)2

fe

Where:

Fo =   number of times the variable under study was observed in the sample

Fe =   number of times that the variable under study was expected to occur in the sample.

(fo – fe)= The square of fo – fe

(fo – fe)= Average number of the difference in the observed

fe            frequency

Test Of Hypotheses

The characteristics listed below were used for rejecting or accepting the hypothesis when the least possible value of x2 = 0

(a)     x2 had a positive value which increased as the difference between fo and fe increases.

(b)     x2 test was always one failed test lying always to the right hand side Fo had to be a whole number where Fe needed not be a whole number.

(c)     In taking a decision for x2 test, if x2 computed was greater the x2 table value that is critical value, then the null hypothesis (Ho) will be rejected and if x2 was less than the critical value (x2 ), then null hypothesis was accepted.

(d)     In determining the critical value (x2 value), the appropriate number on degree of freedom was given as follows:

df = (r – 1)

Where df = degree of freedom

R = Number of rows which the data tabulated.

For this study the df = 5 – 1) = 4df

Checking in the x2 value table, the critical value is 9.49 which is used in accepting or rejecting hypothesis tested on this work.

Presentation/Analysis of Data And Results

In this section, relevant data for validating null hypothesis and for answering the research questions were presented and analyzed. Also, the result of the analysis and test of appropriate hypothesis was done mainly through the use of percentages and chi-square (x2 ) analysis/test statistics. All the tests were conducted at significant level of a = 5%

 

Test Of Hypothesis

Impact of the Removal of Petroleum Subsidy on Government’s Disposable Income

Ho = Fo = Fe or (Fo – Fe = 0) i.e

There was no significant difference in the number of respondents tending to agree or disagree that the removal of petroleum subsidy did not give the Nigerian state more disposable income.

Hi = Fo Fe or (Fo – Fe’ 0) i.e

There was a significant difference in the number of respondents tending to agree or disagree that the removal of petroleum subsidy did not give the Nigerian state more disposable income.


 

Table 1: The impact of removal of petroleum subsidy on Government’s Disposable Income.

ITEM SA A U D SD TOTAL
The removal of petroleum subsidy gave the Nigerian state more disposable income 100 167 22 133 78 500
Percentage 20% 33.4% 4.4% 26.1% 15.6% 100%

 

Key: SA = Strongly Agree, A = Agree, U = Undecided, D = Disagree, SD = Strongly Disagreed.

 

 

 

Table 2: Chi-square analysis of respondents views regarding the impact of the removal of petroleum subsidy on government’s disposable income.

Responses Fo Fe (Fo-Fe)2 (Fo-Fe)2

Fe

x2 DF P
SA 100 100 0.00 0.00      
A 167 100 4489.00 44.89      
U 22 100 6084.00 60.84 121.46 4 <05
D 133 100 1089.00 10.89      
SD 78 100 484.00 4.84      
TOTAL 500 500   121.46    

 

Level of significance = a = 5%

Decision Rule: Reject Ho if x2 observe > x2 critical

x2 critical = 9.49 at a = 0.05 df = c-1=5-1 = 4

where c = No of cells (rows) = 5

thus Ho is rejected if x2 observed > 9.49

x2 observed (computed) = a(Fo – Fe)2

Fe

All cell = 121 – 46

Decision

Since x2 observed = 121.46 > x2 critical = 9.49, we reject Ho and conclude in favour of Hi, that the removal of petroleum subsidy gave the Nigerian state more disposable income.

The significance x2 value obtained in table 1 indicate that the departures of observed cells frequencies from the expected value are significant and not due to change. A close look at table 1 reveals that a large proportion of the population of respondents (33.4%) tended to agree that the removal of petroleum subsidy gave government more disposable income. A smaller proportion of the respondents (21.1%) tended to disagree withh the opinion, while (4.4%) were undecided.


 

Removal of Petroleum Subsidy Generates More Employment Opportunities to the Nigerian State

          Table 3: The Respondents view on the question regarding whether the removal of petroleum subsidy led to generation of more employment opportunities.

ITEM SA A U D SD TOTAL
The percentage of petroleum subsidy leads to the generation of more employment opportunities 44 178 11 189 78 500
Percentage 8.8% 35.6% 2.2% 37.8% 15.5% 100%

 

x2 – Analysis of Respondents, views and test of hypothesis.


Ho: There is no significant difference in the number of respondents tending to agree or disagree that the removal of petroleum subsidy led to the generation of more employment opportunity (Fo – Fe = 0)

Hi: There is a significant difference in the number of respondents tending to agree or disagree that the removal of petroleum subsidy led to the generation of more employment opportunities (Fo1 – Fe).

Relevant data for testing HO against Hi are shown in table 4 level of significance = a=5%.

Decision Rule: Reject Ho if x2 observed > x2 critical at a = 5%, x2 critical = 9.49 for df = C-1 = 5-14 where df = degrees of freedom and C = No of Cells (rows).


 

Table 4: Chi-square analysis of respondents’ views regarding whether or not the removal of petroleum subsidy led to the generation of more employment opportunities.

Responses Fo Fe (Fo-Fe)2 (Fo-Fe)2

Fe

x2 DF P
SA 44 100 3136 31.36      
A 178 100 6064        
U 11 100 7921 >9.21 225.4 64 <03
D 189 100 7921        
SD 78 100 884        
TOTAL 500 500   255.46      

 

Significant at a =5%

Decision

 

Since x2 observed = 255.46 > x2 critical = 9.49, we reject Ho (i.e that the cell observations are statistically equal) and we accept Hi, that the cell observations are significantly different.

The analysis reveals that 267 out of 500 respondents ie. 53.4% of them tended to disagree with the assertion that the removal of subsidy led to the generation of more employment opportunities for the Nigerian State. The proportion of respondents disagreeing is significantly greater than the proportion that tended to agree (44.4%) with the assertion. A small proportion of the respondents (22%) were uncertain regarding the effects of the removal of petroleum subsidy on employment generation.

 

Significance of the impact of the removal of petroleum subsidy on the Nigerian Economy

Respondents’ views regarding the significance of the impact of the withdrawal of petroleum subsidy on the Nigerian economy are shown in Table 4 below.


 

Table 4: Respondents views regarding the significance of the impact of the withdrawal of petroleum subsidy on the Nigerian economy.

No of respondents

ITEM SA A U D SD TOTAL
Removal of petroleum subsidy had no tangible or significant impact on the Nigerian economy 56 133 22 133 156 500
Percentage 11.2% 26.6% 4.4% 26.6% 31.2% 100%

 

 

The table above showed that a larger population of the respondents (57.5%) tended to disagree that the removal of petroleum subsidy had significant impact on the Nigerian economy. The statistical significance of this finding is shown in table 4 which represents an X2 analysis of respondents’ views in this regard.

X2– Analysis and Test of Hypothesis regarding the impact of withdrawal of petroleum subsidy on the Nigerian Economy.

The following null hypothesis was tested on the number of respondents tending to agree or disagree that the withdrawal of petroleum subsidy had impact on the Nigerian economy.

Hi: Fo1 fe (Overall cells) i.e there would be a significant difference in the number of respondents tending to agree or disagree that the withdrawal of petroleum subsidy had a tangible impact on the Nigerian economy.

Decision rule: We reject Ho if x2  tabulated is >9.49, at a=5%

 

 

 

Table 5: Chi-square Analysis of Respondents’ view Regarding, the Significance of the Withdrawal of Petroleum Subsidy on the Nigerian economy.

 Responses Fo Fe (Fo-Fe)2 (Fo-Fe)2

Fe

x2 DF P
SA 56 100 1936 19.36      
A 133 100 1089 10.89      
U 22 100 6084 60.84 133.84 4 <0.5
D 133 100 1089 10.89      
ST 156 100 3136 31.36      
TOTAL 500 500   133.34      

 


Decision: The calculated value of x2 = 133.34 greater than the critical value of 9.49 at a significance level of 0.05 and 4 degree of freedom. We therefore reject the null hypothesis, Ho (i.e that all the cells entries or observation are equal) and accept the alternative hypothesis that the cell observations are not all statistically equal of x=5%. We further examined the cells and found out that there was tendency for the majority of respondents (57.8%) to disagree that withdrawal of the subsidy had no significant impact on the Nigerian economy, while a smaller proportion, 37.8% tended to agree that it had significant impact on the economy, 4.4% of respondents were uncertain as to its significance or impact on the Nigeria economy.

Removal of Subsidy and Servicing of Nigeria’s External Debt

Another important aspect of this study was to examine the relevance of petroleum subsidy on external debt-servicing in Nigeria. Table VII shows respondents views regarding this fact. The table shows the number of respondents who agreed or disagreed that the removal of petroleum subsidy was meant to service Nigeria’s external debt.

 

 

 

TABLE 6: Respondents Views Regarding the Removal of Petroleum subsidy and the servicing of Nigeria’s External Debt.

ITEM SA A U D SD TOTAL
      33 122 111 500
% 13.4 33.4 6.6 24.4 22.2 100

 

 

Table VII shows that the proportion of respondents agreeing to this assertion is 46.8% (13.3% strongly agree while 33.4% agree) while the proportion tending to disagree (pooling SA and A is 46.5%). However, 6.6% of the respondents were uncertain as to whether the withdrawal of subsidy was meant to service Nigeria’s foreign debt. The significance of the difference between the cells observation opinion was further pursued through x2 = analysis and a test of the appropriate null hypothesis. This is shown in Table VIII below.


 

 

Table 7 X2 Analysis of Respondents’ Views Regarding the Withdrawal of Petroleum Subsidy and Servicing of Nigeria’s External Debt

Responses Fo Fe (Fo-Fe)2 (Fo-Fe)2

Fe

x2 DF P
SA 67 100 1089 10.89      
A 167 100 4489 44.89      
U 33 100 4489 44.89 106.72 4 <05
D 122 100 484 48.4      
ST 111 100 121 12.1      
TOTAL 500 500          

 

Ho: Fo=fe(over all cells)

Hi: Fo1fe (overall cells)


Decision: Reject Ho if X2 computed is >9.46 at a=5%, 4df

Decision: Since X computed = 106.725X2 (Critical) = 9.49, we reject Ho (all the observed cells frequencies are statistically equal). We accept Hi, that at least some of the cell frequencies are statistically not equal to some of them (i.e, all cells observations are not equal).

A close look at the table reveals that the entry causing a significant X2 value is the observation under the “Undecided”. However, we find that the number of respondents tending to give a roughly the same as those tending to disagree with the assertion that the withdrawal of the subsidy was meant to service Nigeria’s foreign debt making it difficult to take a clear-cut-decision regarding whether the majority agreed or disagreed. The researcher therefore performed the analysis further by trying the number of respondents tending to be undecided and checking up the significant difference occurring between the number tending to agree and those tending to disagree. The final table in the study (Table 8) shows the X2 analysis and results

 

.

Table 8: X2 Analysis of Respondents Views Regarding the Withdrawal of Subsidy and the Servicing of Nigeria’s debt.

Responses Fo Fe (Fo-Fe)2 (Fo-Fe)2

Fe

x2 DF P
SA/A 234.0 233.5 0.25 0.0003      
SD/D 233.0 233.5 0.25 0.0003 0.006 1 >0.5
TOTAL 467 467   0.0006      

 

 

The computed value of X2 is 0.0006, smaller than the critical value of 3.84. since X2 calculated <X2 critical (for a=0.05, df=1), we accept the null hypothesis that there is no significanct difference between the two cell entries. That is the proportion of respondents tending to agree is statistically equal to the proportion tending to disagree.

In this respect, we cannot conclude based on respondents views whether withdrawal of petroleum subsidy was meant to service Nigeria’s foreign debt or not.

Conclusion

This work sought to examine the impact of the withdrawal of petroleum subsidy on Nigeria’s economy. In order to address the fundamental issues in this work, related hypotheses were formulated and tested.

In consonance with the requirement of empirical research, four hypotheses were formulated and placed on a fifteen-item questionnaire.

Respondents’ views were statistically analyzed through the use of percentages and chi-square. The null hypotheses were tested with a view to validating them.

The findings with respect to hypothesis 1 shows that 54.4 percent of the respondents tended to agree with the assertion that the removal of the petroleum subsidy led to more disposable income for development. Only a small proportion of the respondents, i.e 4.4% were undecided, whereas 42.2 percent of the respondents tended to disagree.

With regard to hypothesis II, the analysis shows that 267 out of 500 respondents tended to disagree that the removal of petroleum subsidy led to the generation of more employment opportunities. Respondents in this category were greater than 44.4 percent that tended to agree with the assertion. After statistical analysis, the Null hypothesis was accepted.

Regarding the third hypothesis that attempted to examine the impact of the removal of petroleum subsidy on Nigeria’s  economy, majority of the respondents refused to agree that it had a significant impact on the economy. Also with respect to hypothesis four, the finding was inclusive. Based on respondents’ views, it was difficult to conclude whether or not the withdrawal of petroleum subsidy was targeted at servicing of Nigeria’s external debt.

In view of our findings, we came to the conclusion that the withdrawal of petroleum subsidy in particular and subsidy to firms in general as prescribed by the government has no significant relationship to the economic viability.

Recommendations

Giving the findings in our empirical studies, the following recommendations were made:

Nigerian policy makers must come to grip with the fact that externally oriented solutions to economic crisis are not in the best interest of Nigeria. Thus when solutions are advanced, their suitability should be ascertained before application.

A glance at the national economy reveals that unemployment rate is still on the increase. Also, the country’s inflation rate is very high and the standard of living has fallen drastically. All these have occurred regardless of deregulation attempt by the state.

We therefore, recommend that the application of ineffective and inefficient policies as enacted by the government is the root of this crisis. As a way forward, the Nigerian state should stop forthwith, excessive deregulation of the economy. In this regard, unfettered markets deregulation of the economy should be halted in favour of government intervention by the re-introduction of subsidy. We tend to agree with the same recommendation by Ekpe (2003) that fuel subsidy in Nigeria is desirable

This is because, reliance on market forces tends to distort national priorities. Government intervention has the advantage of repositioning the national economy in the direction of needs (Ake, 2001).

In the light of the above, it is recommended that in order to strengthen the productive capacity in Nigeria, government should rather improve the level of distribution of income and indeed, satisfy basic human needs. Subsidies and other incentives should be given to firms in order to boost production in particular and revitalize the economy in general. The earlier recommendations by Ekpe (2003 on “The IMF, Price Deregulation and Third World Development: An Empirical Analysis of the Withdrawal of Petroleum Subsidy on Nigeria’s Economy” is therefore upheld.

 


 

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