Nigeria’s Fuel Subsidy Removal Is A Disaster, Here’s What Malaysia Can Learn From It

Speculation is rife on when the fuel subsidy cuts on a wider scale will be implemented in Malaysia. In fact, a recent international news report indicated that Malaysia cannot afford to delay the painful decision any longer. The report highlighted that the Malaysian government expenditure for the first half of 2024 climbed to a new high of 53.9% of the whole year’s budget.

However, removing fuel subsidies to safeguard government coffers is not unique to Malaysia. Last year, in June 2023, Nigeria made the landmark decision to remove their fuel subsidies, after almost 50 years of providing fuel subsidies to Nigerians. 

Almost immediately after, the full brunt of the decision was made known to Nigerians, with their inflation rate rising at astronomical rates, even when global inflation was shown to be slowing down.

Seeing that the Malaysian government is set on abolishing the fuel subsidy here as well, is there anything we can do to avoid what happened to Nigeria? Let’s have a look at what we can learn from Nigeria’s fuel subsidy removal.

Why did Nigeria remove their fuel subsidy?

First things first, we have to understand the context behind Nigeria’s fuel subsidy removal. Nigeria is the largest oil exporter in Africa. However, it imports nearly all its fuel as it does not refine enough to meet the demand of its 200 million citizens.

As they are importing fuel, the fuel subsidy was needed to ensure that Nigerians won’t be adversely affected when global fuel prices skyrocket.

The fuel subsidy has been around in Nigeria since the 1970s. This makes it a longstanding incentive their citizens have grown used to enjoying in the country.

So why did Nigeria decide to remove it? Here are the reasons which you can also immediately draw parallels to Malaysia.

It was unsustainable

Perhaps the most important reason that Nigeria removed their subsidies, is because they deem it unsustainable.

And for good reason. According to Reuters, the Nigerian National Petroleum Corporation (NNPC) spent $10 billion on fuel subsidies in 2022, which was about 40% of the country’s revenue.

It was unequal

One important thing to understand when discussing the fuel subsidy in Nigeria is that – very few Nigerians own cars.

Nigeria is among the countries with the least number of vehicles per capita, with 0.06 vehicles per person or 50 vehicles per 1,000 Nigerians.

Naturally, the people owning vehicles are the more affluent sections of the population, which means that the subsidies are going to people who are undeserving of it.

It was susceptible to corruption

And finally, the fuel subsidy was also very exposed to graft and corrupt practices.

In 2023, reports of a missing $2.1bn subsidy payouts were made public, and rights group, the Socio-Economic Rights and Accountability Project (SERAP) urged the Nigerian president to set up a probe to investigate.

Nigeria also has a smuggling problem when it comes to their fuel, where the subsidised fuel is smuggled to neighbouring countries.

Why is Malaysia removing fuel subsidies?

Okay, sounds like Nigeria has some valid reasons to remove their fuel subsidy, so why exactly is Malaysia removing the fuel subsidy?

Let’s have a look at the reasoning behind Malaysia’s impending fuel subsidy removal.

It is unsustainable

Yes, just like Nigeria, the fuel subsidy in Malaysia is unsustainable.

According to reports, last year alone, the government spent RM81 billion on fuel subsidies, which is untenable by the government.

Combined with the government’s goal to reduce debt level and fiscal deficit, it’s a no-brainer that the fuel subsidy needs to go.

It is unequal

Although Malaysia’s vehicle ownership rate is way higher (over 100%)  than Nigeria, it doesn’t mean that our fuel subsidy is in any way equitable. 

The richest people in Malaysia do use bigger and higher powered cars with bigger fuel tanks. It was reported in Parliament that in 2022, the largest chunk of fuel subsidies at 35% went to the T20 high income population. This means that they are using more of the subsidised fuel compared to the people in the lower income bracket.

Therefore, the subsidy which was supposed to go to people who can’t afford higher fuel prices, is instead going to rich people who honestly speaking, don’t deserve it.

It is susceptible to corruption

And finally, Malaysia’s fuel subsidy is very susceptible to graft and corruption.

Just like Nigeria, our porous borders means that subsidised fuel which is meant for Malaysians are smuggled out of the country to neighbouring countries like Singapore and Thailand.

In fact, during Budget 2024’s tabling last year, Prime Minister Datuk Seri Anwar Ibrahim stated that Malaysia was losing RM10 billion per year thanks to smuggled fuel.

So those are the reasons why Malaysia’s fuel subsidy has to go. See some similarities between Nigeria and Malaysia’s reasons for scrapping the fuel subsidy?

Now let’s look at what happened once Nigeria removed their fuel subsidy.

What happened after Nigeria removed fuel subsidy?

After Nigeria removed their fuel subsidy, as expected, fuel prices tripled across the country.

This in turn caused inflation to skyrocket, going from 18.8% to 24.7% in one year. At a time where the global inflation rate was starting to slow down, it’s hard to not pinpoint fuel subsidy removal as the cause for this.

Nigeria also saw some slowing down of their economy’s growth, with the gross domestic product dropping from 3.3% to 2.9% from 2022 to 2023. It might be harder to say that the fuel subsidy removal was the main catalyst of this drop, but it’s even harder to say that it didn’t have an effect.

As it usually does with inflation, cost of living also skyrocketed, as although Nigeria’s vehicle ownership rate might be low, but Nigeria is home to millions of households who rely on petrol generators for power due to intermittent grid supply.

This then in turn, caused political and public unrest, as unions started going on strike in protest of the fuel subsidy removal, which in turn shut down the nation’s economy.

Come 2024 and it looks like the government has reinstated some form of fuel subsidy. Recent news reports cite the International Monetary Fund, petrol prices in the country are being subsidised to keep it at a managed price point despite the Nigerian currency being devalued several times since last July. This silent reintroduction of fuel subsidies is likely to drain almost half of the revenue that Nigeria earns from oil exports in 2024.

How do we avoid all this happening in Malaysia?

So now that we know all that happened in Nigeria once they removed the fuel subsidy, the question remains – how do we stop something similar happening in Malaysia?

One suggestion is to make the fuel subsidy removal gradual, instead of a one-off removal.

Another suggestion, which is proposed by The World Bank is to set a temporary price cap, to ensure that consumers are not burdened by the sudden skyrocketing of fuel prices.

While this might not save as much money as outright removing the fuel subsidies without any control mechanism, it will still have the effect of reducing the fiscal burden of the subsidies on the government.

How other countries have removed fuel subsidy

Another example is the approach taken by the Philippines, who removed their fuel subsidies in the 1990s. The Philippines took the approach of controlling the price by introducing periodic price adjustments. They combined this with social welfare initiatives to reduce the impact of fuel subsidies.

Dialogues with key stakeholders must also not be neglected, as in the case of Ukraine. The Eastern European undertook significant subsidy reforms in 2015.

Ukraine combined social protection initiatives with dialogues with key stakeholders in the country to understand the impact of the subsidy reform. At the same time, it was also educating Ukrainians on the importance of the subsidy reforms.

But looking at all these measures, it’s clear to see that a gradual removal of subsidies might work better for the economy, instead of a quick band-aid rip solution.

The fuel subsidy removal is imminent, as stated by the Malaysian government multiple times before. 

While no one can truly predict its effects on the Malaysian economy and most importantly its people, what we can definitely do is take precursors from other countries who have successfully removed their subsidies.