The subsidy trap: What Nigeria would be reversing, By Akeem Bello

The pain of reform is real, but reversing an unsustainable system may cost more than sustaining it

Countries often learn an old economic lesson only after considerable pain: you cannot reconstruct an economy without disturbing the arrangements that held the old one together. Serious reforms frequently impose immediate costs before their benefits become visible. The difficulty is that the pain is immediate and personal, while the benefits are often delayed and difficult to attribute. Nigeria’s renewed debate over petrol subsidy, following former Vice President Atiku Abubakar’s declaration that he would restore subsidy if elected president in 2027, therefore deserves to be treated as an economic question rather than another partisan quarrel. Indeed, the emergence of a serious policy debate this early around a forthcoming presidential election may itself be one of the encouraging signs that Nigeria’s democracy is gradually developing, as voters increasingly encounter competing ideas about how the economy should be managed rather than only competing personalities.

The Pain Is Real, But So Is the Economics of Reform

The hardship Nigerians have experienced since subsidy removal is real and should not be minimised. Transport costs increased, production costs rose, food prices absorbed higher logistics expenses, and household purchasing power weakened. Scholarly research confirms these effects. Okorie and Wesseh (2024), in their research titled Fossil Fuel Subsidy Removal, Economic Welfare, and Environmental Quality under Alternative Policy Schemes, used a computable general equilibrium model of Nigeria and found that subsidy removal increased prices and reduced economic welfare under their baseline scenario. Shittu et al. (2024), in their study titled Assessing the Compensation and Reinvestment Plans for Fuel Subsidy Rationalization in Nigeria: A Dynamic Computable General Equilibrium Approach, similarly found that a complete and immediate removal produced severe economic headwinds and significant welfare losses, although compensation and reinvestment substantially improved the outcome.

That evidence is important because a serious defence of reform cannot begin by denying the pain it caused. The more important question is whether short term welfare loss is sufficient evidence that the reform itself was economically wrong. It is not. Economic reform must be evaluated over time because its costs and benefits occur at different points. The proper comparison is therefore not simply between petrol prices before and after 2023, but between the economic trajectory created by reform and the trajectory Nigeria would have followed had the old system remained.

Reform Is Often Painful Before It Becomes Productive

Structural reform frequently reallocates resources from an existing arrangement towards a potentially more productive one. That process creates adjustment costs because businesses, households, labour and institutions cannot instantly change their behaviour. A price that has been artificially suppressed for years cannot suddenly become market-determined without consequences.

This is not an argument for inflicting hardship in the name of economics. It is an argument for distinguishing between the cost of changing an inefficient system and the cost of preserving it. Alesina and Ardagna (2010), in their study titled Large Changes in Fiscal Policy: Taxes Versus Spending, examined major fiscal adjustments and found that the composition of adjustment matters for its effects on debt, deficits and economic activity. Their work reinforces the broader principle that fiscal reform should be assessed beyond its immediate contractionary consequences.

The international development experience offers similar lessons. India’s 1991 reforms occurred during a severe balance of payments crisis and involved dismantling important elements of a highly regulated economic structure. Ahluwalia (2002), in his Journal of Economic Perspectives article titled Economic Reforms in India Since 1991: Has Gradualism Worked?, found that India’s reform process contributed to improved economic performance, while emphasising that implementation was critical. Vietnam’s Đổi Mới reforms and China’s long transition from central planning towards a more market oriented economy likewise involved substantial adjustment, but ultimately supported remarkable increases in productivity, investment and living standards. The World Bank estimates that China lifted almost 800 million people out of extreme poverty during its reform and development process.

These examples should not romanticise hardship. Their lesson is more precise. Reform induced hardship can be justified economically only when the reform corrects a genuine distortion, and the state uses the transition to create higher productivity, investment, and welfare. If citizens suffer while the resulting fiscal space is wasted, the social contract behind reform begins to collapse.

Fuel Subsidy, Social Protection or Expensive Distortion?

Fuel subsidies are complicated because they can serve a legitimate social function while also creating serious economic distortions. Government may subsidise energy because transport and energy costs affect almost every household and business. The difficulty begins when a universal price subsidy becomes the principal instrument of social protection.

Rentschler (2016), in his research titled Incidence and Impact: The Regional Variation of Poverty Effects Due to Fossil Fuel Subsidy Reform, demonstrated that subsidy removal can produce substantial poverty effects and that compensation must be carefully designed according to regional differences. His modelling of Nigeria found that uncompensated removal could increase the national poverty rate by about 3 to 4 per cent, while a uniform compensation scheme could still fail to protect households adequately in many states.

Yet Rentschler’s work also points towards the solution. The problem is not necessarily the removal of an inefficient subsidy; it is whether government replaces it with effective and targeted protection.

The World Bank has similarly found Nigeria’s petrol subsidy to have been costly and poorly targeted, with substantial benefits accruing to relatively better off consumers. Between 2019 and 2022, the subsidy cost Nigeria more than ₦8.6 trillion. The policy therefore consumed resources that could have been deployed elsewhere while encouraging consumption, smuggling and arbitrage.

The relevant question is consequently not whether poor Nigerians deserve protection. They do. The question is whether spending enormous public resources to make every litre of petrol cheaper is the most efficient way of protecting them. The evidence suggests that it is not.

The Economic Audacity of the 2023 Decision

President Bola Tinubu’s decision on 29 May 2023 was economically consequential because it confronted a problem that successive administrations had repeatedly postponed. The World Bank and IMF have consistently supported the removal of costly and poorly targeted energy subsidies as part of Nigeria’s broader stabilisation effort. The IMF’s 2025 Article IV assessment noted the continued importance of eliminating costly, untargeted energy subsidies while strengthening targeted transfers to vulnerable households.

Acknowledging this economic rationale does not mean every aspect of the implementation was optimal. The reform imposed severe adjustment costs, and government could reasonably have been expected to cushion vulnerable households more quickly and effectively. As earlier cited, Shittu et al. (2024) further found that compensation and reinvestment could substantially reduce the welfare losses associated with removal.

That finding changes the character of the debate. It is not simply subsidy or no subsidy. It is also about what replaces subsidy as a social protection mechanism.

The Hardship Must Not Be Romanticised

Defending structural reform should never mean asking citizens to celebrate hardship. The evidence is clear: adjustment costs are real, but they must be recognised, managed and fairly shared. As earlier cited, Shittu et al. (2024) found that compensation and reinvestment can substantially reduce welfare losses, while Rentschler (2016) showed that effective support must be targeted to the differing needs of households and regions.

The Federal Government did not leave the transition entirely unaddressed. Its response included conditional cash transfers, wage and minimum wage measures, grain and fertiliser support, the CNG transport programme, assistance for small businesses, housing initiatives and student financing through NELFUND. By March 2025, the IMF reported that about 5.5 million vulnerable households had received up to three monthly cash transfer payments.

The more persuasive criticism, therefore, is not that nothing was done, but that the interventions have not been sufficiently rapid, extensive or effectively targeted to offset the hardship many Nigerians continue to experience. That remains a legitimate policy challenge.

The broader lesson is that temporary palliatives cannot substitute for structural solutions. The social protection role once performed by a universal petrol subsidy should be replaced with fiscally sustainable, well targeted support, while the fiscal space created by reform is invested in productive sectors, domestic refining, infrastructure and public services. Reform is justified not by the pain it creates, but by its ability to transform that sacrifice into higher productivity, stronger purchasing power and lasting improvements in citizens’ welfare.

The Other Half of the Federation

There is another part of the Nigerian story that deserves considerably more attention, the role of state and local governments.

Nigeria is a federation. Many services that determine whether citizens actually experience an improvement in their welfare, including primary healthcare, basic education, local roads, markets, water, agricultural support and social assistance, depend heavily on subnational governments. The World Bank’s work on state and local governance has repeatedly identified state capacity, public financial management and local government functionality as critical to effective service delivery. It has also observed the general inability of many local governments to deliver effectively on their mandates.

The fiscal implications of subsidy removal are equally federal. According to the Federal Ministry of Finance’s current account, the estimated ₦15.8 trillion in subsidy savings between June 2023 and December 2025 was distributed across the federation, with ₦5.43 trillion attributed to the Federal Government, ₦6.52 trillion to states and ₦3.88 trillion to local governments.

This is important. It is misleading to ask what the Federal Government did with ₦15.8 trillion as though the entire amount belonged to Abuja. More than ₦10 trillion went to states and local governments.

This raises a legitimate accountability question for governors. Responses to the hardship of subsidy removal have varied considerably across states, with evidence of uneven provision of palliatives and social interventions. This should not be turned into a collective accusation of corruption, because allegations require evidence. But it is reasonable to ask whether states have used the additional resources available to them.

The issue matters because the success of the national reform depends partly on the performance of subnational governments. A Federal Government may stabilise public finances, but if states do not translate increased allocations into better health, education, transport, agriculture and social services, citizens will understandably feel that reform has produced little benefit.

Local Government Autonomy and the Transmission Problem

The local government question makes this even more complicated. The World Bank’s State and Local Governance Reform Project identified the limited functionality of local governments and the need for greater devolution of authority as major governance issues. The Supreme Court’s 2024 decision on local government financial autonomy subsequently brought the question of direct access to local government funds into sharper national focus.

This matters because fiscal reform is ultimately about transmission. If additional resources are generated at the federal level, distributed through the Federation Account and then become trapped in institutional bottlenecks before reaching communities, citizens may conclude that reform produced nothing even when the national fiscal position has improved.

Successful reform therefore requires functional federalism. States must spend responsibly, local governments must become genuinely functional, and citizens must be able to see how public resources are being used.

What If Subsidy Had Not Been Removed?

This is perhaps the most important counterfactual in the debate.

It is easy to compare yesterday’s petrol price with today’s and conclude that Nigeria was better off before reform. But serious economic analysis cannot compare only the price at the pump. It must compare the entire fiscal and macroeconomic trajectory.

The World Bank’s counterfactual analysis indicated that retaining subsidy would have produced substantially larger fiscal deficits than the reform scenario. The old system was already consuming extraordinary public resources, while NNPCL was carrying a substantial financial burden through foregone revenues and accumulated obligations.

Had subsidy remained, Nigeria would still have had to finance the difference between the economic cost of petrol and the politically determined pump price. It could have done so through lower public expenditure elsewhere, increased borrowing, reduced oil revenues available for other purposes, monetary financing or a combination of these measures.

None would have been costless. Borrowing has to be serviced. Monetary financing can intensify inflation. Foregone public investment carries opportunity costs. Reduced revenues weaken the capacity of the Federation to invest in infrastructure and human capital.

As earlier noted, the counterfactual was therefore not subsidy versus hardship. It was visible hardship now versus the possibility of a deeper and less manageable fiscal adjustment later. Borrowing and other measures used to preserve an unsustainable subsidy would only postpone the adjustment while increasing the eventual burden.

Where Did the ₦15.8 Trillion Go?

The controversy over subsidy savings has also suffered from a basic misunderstanding of Nigeria’s federal structure.

The Federal Ministry of Finance’s current account as earlier quoted shows that the estimated ₦15.8 trillion was shared across the three tiers, ₦5.43 trillion for the Federal Government, ₦6.52 trillion for states and ₦3.88 trillion for local governments. The Federal Government also distinguishes its subsidy savings from other incremental revenues and borrowing.

The Federal Government’s figures show ₦20.4 trillion in incremental resources, comprising its ₦5.43 trillion subsidy related share, ₦3.12 trillion in other incremental revenues and ₦11.85 trillion in incremental borrowing. Against this were approximately ₦30.64 trillion in additional expenditure pressures, including wage adjustments and the increased naira cost of servicing existing foreign currency debt.

The intellectually honest conclusion is therefore that subsidy removal generated fiscal relief for the federation. It did not create a single ₦15.8 trillion cash balance sitting exclusively with the Federal Government.

That does not remove the accountability question. It makes the question more precise: what did each tier of government do with the additional resources it received, and what measurable public value did those resources create?

The Reform Dividend Is Beginning to Appear

There are signs that the broader reform environment is producing changes that would have been difficult under the old fiscal structure, although it would be wrong to attribute every improvement exclusively to subsidy removal.

NELFUND is one example. Its expansion has created a national mechanism for financing higher education on a scale previously unavailable. The programme illustrates the kind of human capital investment that becomes easier to sustain when government is no longer carrying an enormous recurring petrol subsidy obligation.

Infrastructure provides another example. Proposed federal road allocations have increased substantially. Yet appropriation is not execution. A budgetary provision becomes an economic gain only when a road is actually constructed, a hospital equipped or a productive asset completed.

External reserves provide another useful indicator. Nigeria’s external position has improved considerably within the broader reform period. But, as with other indicators, subsidy removal alone cannot claim responsibility for every improvement. Oil receipts, foreign exchange reform, capital inflows, remittances and monetary policy have also contributed.

The appropriate conclusion is therefore measured: the subsidy and foreign exchange reforms have formed part of a broader stabilisation programme that has materially improved Nigeria’s macroeconomic position, though the benefits will gradually manifest if the reform is adequately sustained and properly implemented.

Atiku’s Proposal and the Burden of Proof

Atiku’s concern about declining purchasing power is economically legitimate. Higher petrol prices transmit through transportation, production and distribution into the wider price structure. The question is whether restoring subsidy is the most efficient answer.

Atiku has presented his proposal as a restoration of subsidy, while his subsequent explanation has also emphasised domestic refining and production. The distinction matters. Temporary and transparent support for domestic refining, tied to measurable production outcomes, can be considered an industrial policy. A universal and open ended petrol subsidy is a different proposition.

If government sells crude to refiners below its economic opportunity cost, the intervention remains a subsidy. If government subsidises petrol consumption directly, it remains a consumption subsidy. If government guarantees an artificially low pump price indefinitely, the fiscal liability returns.

The burden of proof should therefore rest on the proposed policy. How much will it cost? Who will benefit? How will it be financed and audited? What increase in domestic refining will it produce? How will smuggling and arbitrage be controlled? What happens when crude prices rise? What is the exit mechanism?

Without convincing answers, restoration risks recreating the fiscal problem Nigeria has spent years trying to escape.

From Subsidising Consumption to Financing Production

The more important strategic question is therefore whether Nigeria should subsidise consumption or support the transition towards competitive domestic production.

A consumption subsidy makes petrol artificially cheap regardless of how efficiently it is produced. A production oriented intervention seeks to reduce the cost of producing petrol by improving domestic refining, crude supply, logistics, infrastructure and competition.

Nigeria should be moving towards the second.

The emergence of large scale domestic refining makes this particularly important. Nigeria now has the opportunity to reduce dependence on imported petroleum products and develop a stronger downstream industry. The policy objective should therefore be cheaper petroleum through greater efficiency, not permanently cheaper petroleum through government expenditure.

The Reform Has Created a Window

The removal of subsidy was not the end of Nigeria’s economic reform programme. It was the beginning. The World Bank and IMF have consistently linked subsidy removal and foreign exchange reform to the rebuilding of fiscal space and macroeconomic stability, while also stressing the importance of sustained implementation and social protection.

The administration should therefore be judged neither by unconditional praise nor by retrospective condemnation. The economic case for the direction of reform is strongest where evidence shows that the old arrangement was fiscally unsustainable and poorly targeted. Its continuing challenge is to ensure that the benefits of reform reach households.

The Federal Government must strengthen social protection, convert fiscal space into productive investment, support domestic refining, rebuild external buffers and improve the purchasing power of citizens. But the same accountability must extend to state governments. They have received substantially larger allocations and cannot reasonably expect Abuja to carry the entire burden of cushioning citizens.

Nigeria’s federal structure means that successful reform requires coordination across all three tiers. A Federal Government that reforms the macroeconomy while states fail to deliver services and local governments remain institutionally constrained will struggle to convert fiscal reform into human development.

The Real Choice Before Nigeria

The choice before Nigerians is therefore not simply between cheap petrol and expensive petrol. It is between two economic models.

One preserves a price distortion because removing it is painful. The other corrects the distortion while investing in people, production and institutions so that the adjustment does not become permanent impoverishment.

The second model is more demanding. It requires government to resist politically convenient subsidies and use the resulting fiscal space productively. It also requires citizens to demand accountability from every level of government, not only Abuja.

Nigeria should not pretend that subsidy removal has already delivered prosperity. It has not. Nigerians continue to face serious cost of living pressures, and government must do considerably more to ensure that macroeconomic stabilisation translates into household welfare.

But neither should Nigeria pretend that the old subsidy regime was costless or sustainable. It was not.

Had subsidy remained, government would still have needed to finance the growing gap between regulated petrol prices and the economic cost of supplying the product. Borrowing, foregone public investment, monetary financing and other temporary devices could have delayed the consequences, but none would have made the underlying fiscal imbalance sustainable.

The central question is therefore not whether reform has caused pain. It unquestionably has. The central question is whether Nigeria will use that pain to build a more productive economy.

The Reform Must Deliver Its Dividend

The estimated ₦15.8 trillion should not become an empty political slogan. The Federal Government’s share, the states’ share and the local governments’ share must all be subjected to measurable accountability. Infrastructure allocations must become completed infrastructure. Social interventions must reach those for whom they were designed. NELFUND must strengthen human capital. Domestic refining must become more efficient and competitive. Stronger reserves must provide greater resilience. States must demonstrate that increased revenues are translating into services. Local governments must be allowed and required to function.

If these things happen, history may eventually judge the 2023 subsidy decision differently from the way it is experienced today. Nigerians may look back and conclude that the immediate sacrifice was the price of moving away from an unsustainable system towards a more productive one.

If they do not happen, the reform will remain vulnerable to reversal.

The most important responsibility now rests not with those defending subsidy removal and not with those proposing its restoration. It rTests with the institutions must demonstrate that reform produces results.

The pain of reform is not proof that reform was wrong. But failure to convert that pain into development would be a failure of reform.

Nigeria should therefore protect vulnerable people, support strategic production, strengthen social protection, demand accountability from every tier of government and invest relentlessly in productivity.

Nigeria should be careful not to return to an economic arrangement whose fiscal unsustainability it has already experienced.

The country has already paid the price of reform.

The task now is to make sure it does not pay that price for nothing.

Akeem Bello writes from BOUESTI and lives in Ado-Ekiti, Ekiti State.