Nigeria’s transition from oil revenue windfalls to shortfalls because of the slump in global price of oil since July 2014 means an inevitable end to unsustainable general subsidy programmes that the government had pursued for decades. Nigeria had used commodity price windfalls to maintain a regime of general subsidies. Subsidies on the pump prices of petrol, electricity tariffs, and an overvalued exchange rate were the most common. Weak commodity prices in the two years since July 2014 and a bleak outlook for the near future clearly meant that the windfalls required to back the subsidy regimes are gone, revenue shortfalls are now a grim reality, general subsidies have become fiscally unsustainable.
Consequently, the government embarked on the following:
- 45 percent increase in electricity tariff from February 1 2016
- 6 percent increase in the pump price of petrol on May 11 2016
- 40 percent downward adjustment of the exchange rate of the Naira on June 20 2016.
It is important to note that the above generalised subsidy removal measures were taken because the income required to maintain them are no longer available to the government, as such no fiscal savings will result from an end to the general subsidy programmes. Had the government ended the regressive subsidy programmes while the windfalls lasted, it would have been possible to use part of the resulting savings to fund policies that would enhance the welfare of the poor. Since downward adjustment of the exchange rate however enhances the Naira value of the proceeds of oil exports, part of the naira gain could still be applied to protect losses of the poor who will suffer more than average welfare losses from the impact of exchange rate adjustment.
Necessary adjustments had been delayed by concerns about the vulnerability of the poor. But now that the adjustments have become inevitable and have indeed occurred, there is a need to identify those who might be negatively impacted and estimate the magnitudes of the harm they are likely to suffer. This study presents new empirical evidence on the sizes of the distributional effects of the exchange rate flexibility on the different income groups in the country, across rural and urban areas, and across the six geopolitical zones.