Restoring revenue integrity, correcting price distortions

Nigeria's government and international observers have long promoted a seductive narrative: remove fuel subsidies, unlock instant fiscal windfalls, and solve the budget crisis. This framing dominates policy circles from Abuja to Washington. But the claim collapses under scrutiny.

**Subsidy removal does not generate revenue. It eliminates a loss.** This distinction matters profoundly for investors assessing Nigeria's fiscal trajectory and macroeconomic stability.

### What Actually Happens When Subsidies End?

When Nigeria maintained petrol subsidies, the government paid the difference between the controlled domestic price and the global market rate. A litre sold at ₦500 while the international cost was ₦700 meant a ₦200 per-litre loss. That loss was real: it drained Treasury reserves, crowded out spending on roads, hospitals, and schools, and created perverse incentives for hoarding and cross-border smuggling.

Removing the subsidy stops the bleeding. The government no longer bridges that gap. But this is cost containment, not revenue generation. It frees up cash previously burned—similar to a household cutting waste, not earning more income.

The confusion stems from crude fiscal accounting. Policymakers often frame subsidy removal as a revenue line item. It is not. The correct frame: subsidy removal is an *expenditure reduction* that improves the fiscal balance. Nigeria's 2024-2025 budget benefited from this, but the benefit was one-time, structural, and non-recurring.

### Market Distortions and Price Discovery

The deeper implication: **subsidy removal corrects mispricing that distorts investment.** When petrol cost ₦165/litre under subsidy (pre-2023), every downstream business—transport, manufacturing, energy—made decisions based on false prices. Investment flowed to inefficient sectors. Real costs were hidden.

Post-removal, with petrol trading near ₦900-₦1,000/litre, market participants see actual resource scarcity. This drives genuine efficiency. Transport operators shift to compressed natural gas. Manufacturers relocate near power sources. Refineries become economically viable. These shifts are painful short-term but productivity-enhancing long-term.

Investors tracking Nigeria's industrial competitiveness should watch this transition. A firm's ability to survive true input costs signals genuine comparative advantage—not subsidy-dependent fragility.

### Why This Matters for Nigeria's Fiscal Story

The IMF, World Bank, and Nigeria's own fiscal authorities have tied structural adjustment to subsidy removal. The implicit deal: remove subsidies, stabilize the currency, attract investment. But if removal doesn't create revenue, where does fiscal space come from?

Answer: **tax compliance and broadening the tax base.** Nigeria's federal government collects ~6% of GDP in tax revenue—among Africa's lowest. Even with subsidy removal, fiscal consolidation requires improving tax administration, formalizing the economy, and reducing leakage. The 2024 Dangote Refinery coming online adds corporate tax revenue. Telecom and financial services growth expands VAT collection. These are the real revenue drivers.

Subsidy removal is a necessary condition for fiscal stability, not a sufficient one. Investors should expect continued budget pressure until tax efficiency improves. That process typically takes 3-5 years.

### The Inflation and Exchange Rate Spillover

One more reality: subsidy removal is instantly inflationary. Petrol costs hit transport, food, utilities. Nigeria saw inflation spike above 30% post-removal. The Central Bank's interest rate hikes (now 27.25%) have capped currency depreciation but raised borrowing costs. This creates a squeeze: businesses face higher input costs *and* higher financing costs simultaneously.

Companies with dollar revenues (agricultural exports, telecoms) benefit. Import-dependent manufacturers suffer. Portfolio investors in naira bonds gain from high yields but face currency risk. This bifurcation will persist until inflation returns to single digits—likely 2026 at best.

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