People & Money

The Nigeria Oil and Other Subsidy Traps: Is Freedom in View?


Abundant oil revenues enabled Nigerian governments to institute vast subsidies and statist economic controls. These government interventions progressively weakened the competitiveness of the Nigerian economy and the country’s capacity to diversify its exports. This, rather than corruption, explains Nigeria’s persistent economic failure and deep poverty. 

Nigeria discovered oil in commercial quantity in 1956, commencing production in 1957 and exports the following year. By 1970, earnings from oil exports had reached $300 million. It rose astronomically to $6.3 billion by 1976 due to the 1973 Israeli-Arab Yom Kippur war. Arab states had declared an oil supply embargo against the United States of America and other Western nations for taking sides with Israel. This triggered a sharp rise in oil prices and created a massive windfall for Nigeria.

Nigeria’s earnings from oil exports rose from $300 million in 1970 to $6.3 billion in 1976. The money was spent faster than the oil gushed through the pipelines. By 1978, the Federal Government had more than tripled its annual spending. And by the end of 1978, Nigeria had accumulated over $3.3 billion in external debts. The Shagari administration inherited an external reserve of about $5.1 billion in 1979. But by the time it was deposed in a coup in 1983, Nigeria’s external debt had climbed to $20 billion.

The rise in oil prices during the Arab-Israeli war also led to a decision to subsidize petrol prices for Nigerian users. This was a seemingly wise decision. Why inflict pain on Nigerians who did not take sides in the Arab-Israeli war? But this was the beginning of one of the greatest policy tragedies in economic history.

Why is Nigeria Trapped In Subsidy?

Nigeria’s oil industry and, indeed, the Nigerian economy has been trapped because of this decision to protect Nigerians from the rise in the global crude oil price since 1973. Many governments have tried to remove the fuel subsidy, but none have succeeded in eliminating it. In the first of such subsidy removal efforts, the Murtala-Obasanjo Government 1976 increased fuel prices by 76.3%. However, it was not possible to achieve a total removal of fuel subsidies.

While some governments saved their Arab-Israeli War oil windfall, Nigeria rapidly increased government expenditure, doubling the capital budget in some years, far beyond the capacity to plan or manage projects. The result was massive oil theft, mindless waste, increased unemployment rate, and crippling debts.

As oil revenue flowed in, Nigeria doubled expenditure in 1974 and again in 1975. The Nigerian Government spent 18% less than it earned between 1971 and 1973. In 1974 the FGN saved 46% of its revenue which had increased by 183 %. But between 1975 and 1978, the FGN spent 24% more than it earned, i.e., its expenditure in these four years was more than 3 times what it spent in 1973 before the Yom Kippur oil sector boom. Oil reserves were depleted, and foreign loans supplemented the expenditure splurge; by 1978, Nigeria had accumulated over $3.3 billion in external loans and had a big budget deficit.

In 1979, the Shagari administration inherited an external reserve of about $5.1 billion, but by the time it was deposed in a coup, it had incurred an external debt of $20 billion. While it is popular to blame the corruption of the politicians for this outcome, it is ultimately explained by the set of economic ideas that allocated a central role to the state in improving social welfare and achieving economic development and bestowed on it vast tools to play this role. By their very nature, the policy set encouraged waste and corruption.

Emblematic Fraud – The Cement Armada

The principal objective of public procurement seemed to have been to spend as much money as possible, as quickly as possible so that as much as possible could be stolen. Perhaps, nothing symbolises this objective better than the so-called “cement armada” scandal. Nigeria, in 1975 ordered 20 million tons of cement, with 16 million tons requested by the Ministry of Defense, i.e., the military guys in power.

The quantity of cement ordered was twice as much as the off-loading capacity of all Nigerian ports. The result was a long line of ships, as many as 420 were counted in September 1976, stretching into the Atlantic Ocean as far as the eye could see, waiting to deliver their cargo. Some waited for more than a year, with each ship collecting $54,100 per day as demurrage.

As a government inquiry found out, the cement purchased at inflated prices mostly became unusable while waiting to be off-loaded. The government tribunal, however, said it was unable to untangle the “web of kickbacks and bribes involving Government officials, foreign shipowners, corrupt purchasing agents, unscrupulous middlemen, phony corporations, dubious letters of credit, and Swiss bank accounts” that produced the cement armada as the public had not cooperated in volunteering information.

Also Read: BIG READ – Why Asian-Nigerian Businesses Are So Successful

Countries usually finance future development from the proceeds of past or current development, i.e., they invest in roads, urban planning, ports, schools, agriculture extension services, competitively recruited and well-renumerated civil services, etc., from taxes on a range of productive economic activities. States and societies almost automatically develop planning capacities to stimulate further growth in many sectors, often starting with agriculture, and to spend productively on public services that further expand economic activities and diversify production structure.

Nigeria rapidly stopped nurturing the growth of the economic activities, especially agriculture, that countries typically rely on to finance growth at the initial stages of economic modernization.

By the middle of the 1970s, oil provided 77% of the FGN’s revenue; this rose to 80% after a decade. Nigeria also depended on oil dollars to pay for around 80% of exports. While Nigeria produced a wide range of industrial goods, the high exchange rate that oil dollars made possible in 1976, $1 could buy only 0.62 kobo- made Nigeria products too expensive abroad. Soon enough, as Nigeria could not afford to maintain or replace infrastructure, the cost of producing and transporting goods within the country made Nigerian products even more expensive.

Even developed countries with long-established bureaucracies and political systems would have found it impossible to plan and spend efficiently if they doubled yearly expenditures. The expenditure binge established three features of the Nigerian political economy – a deeply entrenched profligate culture, the Nigerian belief that their country is prosperous and should provide many things for free or at huge subsidies for everyone, and a political culture that revolves around capturing state functions and expenditure for personal benefit that gradually permeated the state and society. These features fed each other.

As Nigerians witnessed vast waste and corruption, their belief that their country is rich and should provide free or subsidised goods and services was reinforced. Providing subsidies created even more opportunities for corruption for politicians and bureaucrats.

Also Read: What Nigeria Needs is Transformational Corruption – David Hundeyin

Subsidies Nigeria: The Evil Twin

The Nigerian economy and the country’s destiny have been trapped in twin subsidies since the mid-1970s. The first one is the perennial attempt by the Central Bank of Nigeria to supply foreign currency at an “affordable” rate even when oil prices, Nigeria’s primary source of foreign exchange, fall and limit supply.

The naira exchange rate has no relationship with the capability of the Nigerian economy to produce goods that can be sold abroad to pay for imports. The CBN chooses to maintain this “economic distancing” even when the price of oil falls and offers an opportunity to adjust, i.e., make the price of foreign exchange (the most important price in the economy) less dependent on the international oil price, which is inherently volatile.

The second subsidy is the policy of selling petroleum below global prices and, later, at a cost below the cost of supplying the product.

More Nigerians live in extreme poverty than Indians, despite India having 1.3 billion people. Most Nigerians do not understand how the nation’s poverty is produced by the twin traps of fuel and foreign currency subsidies. Nigerians decided that the country has fabulous oil riches, so oil alone could finance the country’s development. Nigeria has relied on its oil income to pay for roads, education, industrial or agriculture research, pilgrimages, etc.

Nigeria’s Omnipotent Oil Exports Revenue

The disappointing reality is that Nigeria’s oil income is far from adequate to finance the country’s needs, even if the income is honestly invested. In 2018, Saudi Arabia produced 129 barrels of oil for each citizen, Malaysia 7, Kuwait 260, and Norway 101, while Nigeria produced only 3 barrels for each Nigerian.

Successful oil exporters like Malaysia treated oil as additional income they could use to finance development rather than a substitute for the need to nurture the growth of other sectors. The policies Nigerians and their governments have preferred suggest that they think having oil relieves them of the need to use economic resources prudently and invest in things that enable them to compete with other countries.

Nigeria’s insistence on the fuel subsidy has prevented investment that could create domestic jobs and earn foreign exchange. It has massively shifted the country’s wealth from productive investment to unsustainable consumption.

In a 2019 study, the budget tracking NGO, BudgIT disclosed that the FGN spent about N10.78 trillion on the fuel subsidy in 14 years. The N1.5 trillion subsidy expenditure in 2011 was 118% more than the expenditure on infrastructure and more than triple the combined spending on education, healthcare, and roads.

In 2019, according to Bloomberg, Nigeria spent four times more on fuel subsidies than it spent on “building schools, health centers, and science labs,” i.e., a year after Nigeria has declared “the poverty capital of the world.”

Nigeria has more than 10 million children out of school (the highest in the world), and about 80% of primary school leavers in Nigeria cannot read, compared to only 20% in Tanzania. Access and quality problems are funding issues, but Nigeria has explicitly chosen to neglect its human capital while pouring billions into the fraud-ridden petroleum subsidy regime.

Malaysia not only collects the total price of petroleum from most of its citizens, but it also avidly collects money for using the 31 toll roads built by private investors. Malaysia has the best expressway network in Asia, after Japan and China, but most of its expressways and highways are tolled. According to, a global car rental company, it is difficult not to encounter a toll road traveling within Malaysia.

Even wealthy Nigerians, like residents of Lekki, led by a Senior Advocate of Nigeria, Ebun-Olu Adegboruwa, argue against toll roads because Nigerians already pay taxes. But like virtually all the claims of Nigerians, rich as well as poor, on their economy, this is a baseless argument. Malaysia’s tax-to-GDP ratio in 2017 was 12.5%, while Nigeria’s was only 5.7%; the average for 26 African countries was 17.5%

Nigerians’ insistence on funding everything with oil income and the resulting fiscal priorities are well reflected in the country’s productive capacity. In 2018, total Nigerian agriculture exports were N302.3 billion, less than a billion dollars, while Malaysia exported agricultural produce worth $27.5 billion in 2016.

In 2017, Malaysian export of palm oil (along with processed derivatives) was worth $966,000. Nigeria used to export more palm oil than Malaysia in the 1950s and early 1960s but is now a net importer. With a population of 195.9 million and land covering 923,768 square kilometres, Nigeria should be producing much more agricultural goods. Malaysia has a population of 31.53 million and a landmass covering only 329,847 square kilometres.

Oil Prices and Nigeria: Permanent Boom and Burst 

The decision to fix Nigeria’s foreign exchange based on oil export revenue has created a permanent boom and bust-economic cycle. When oil prices are high, Nigeria can manufacture products and create employment because it can afford to pay for imported inputs. Once the oil prices fall, production and employment take a hit.

So as we have “abandoned projects,” i.e., public construction projects started when oil prices are high but left uncompleted when they fall, Nigeria is also replete with “abandoned businesses,” i.e., enterprises destroyed by a fall in oil prices, and the consequent foreign exchange scarcity which suddenly makes inputs unaffordable and makes products too expensive.

This boom and bust cycle, characterised by the hesitant and tardy devaluation of the naira after unsustainably high exchange rates based on high oil prices destroys savings, consumption power, and investment.  Many manufacturers have chosen to export goods to Nigeria rather than establish plants to produce in the country. The zig-zag pattern of consumption power in Nigeria, based on the fluctuation of the international oil price, is a major reason why a host of manufacturers, such as Leyland motors, Dunlop, Michelin, Exide Batteries, Procter and Gamble, etc., have exited Nigeria.

In the early late 1980s, a Spanish maker of building materials considered setting up a Nigerian plant. Ultimately, it decided to keep exporting to Nigeria rather than invest in manufacturing in the country. The critical reason for the decision was Nigeria’s foreign exchange policy. The  Spanish manufacturer concluded that its products would not be protected from imports.  Nigeria could start supplying dollars at a high exchange rate for imports once oil prices recovered.

Nigeria attempted to channel cheap foreign exchange to sectors the Government deemed important, especially manufacturing. The cheap forex ended up funding a wide range of imported consumer goods. It also got Nigerian manufacturing hooked on imported inputs.

CBN dollars still prevent Nigerian manufacturers from developing local alternatives to imported raw materials. A January 2020 media report noted that the oil price collapse of 2015/2016 and the consequent shortage of foreign exchange forced Nigerian manufacturers to intensify sourcing for local raw materials. Nigerian manufacturers started “cutting back on local raw materials sourcing after it became easier to access foreign exchange to import inputs” after oil prices rose.

Subsidised forex also delivered huge “profits” to individuals engaged in “roundtripping” or “arrangee” as the practice of selling cheaper CBN dollars on the black market was known in the 1970s. It achieved precisely the opposite of what the policy intended. It stunted the expansion of the manufacturing base and discouraged investment in manufacturing.

The management of the country’s petrodollars has made Nigeria poorer by creating a volatile microeconomic environment. Nigeria clearly would have been better off without the oil – investors would have been able to plan based on far more stable trends in the country’s consumption.

Will Nigeria be Free From Its Subsidy Trap?

There has been great continuity in the Nigerian political economy. Politicians continue to promise, and citizens demand free or subsidised goods and services. Politicians and bureaucrats make fortunes from delivering the freebies. The stringent economic controls required to deliver them block billions of dollars in private sector investment from Nigeria.

At the same time, the poverty circle draws in more Nigerians. Fuel subsidy not only delivers billions of naira to well-connected smugglers who take Nigerian fuel to sell in neighbouring countries where energy is sold at market prices.  Or to businessmen who are paid for phony imports.  The subsidy regime also blocks investment in domestic refineries.

The American political economist Peter Lewis once noted that in the 1970s and 1980s, possession of an “import permit,” i.e., the piece of paper that allowed lucky bearers to buy cheap dollars from the Central Bank of Nigeria to buy “approved imports,” was the document through which the privileged made fortunes.

When banking was liberalised in the late 1980s, the official document that granted access to sudden fortunes became a banking licence. New bank owners and a few privileged staff in Nigeria speak have “cornered” billions of dollars. The old game continues. The FGN/CBN pretends it supplies subsidized foreign currency to manufacturers. Insiders manufacture papers to enable them to buy and resell the dollars on the black market.

Liberalisation of banking and telecommunications has encouraged genuine enterprise.  A class of Nigerian entrepreneurs emerged who could to a great extent claim to have made huge fortunes mainly through their vision and energy. They have created jobs for hundreds of thousands. But subsidies and economic controls continue to make access to the government a very important source of great wealth. They meanwhile greatly constrict the space for wealth-creating enterprise and investment.

The Buhari government has announced plans to eradicate subsidies for electricity and fuel, not because it was convinced of the tragic poverty economic controls have foisted on Nigeria but because Nigeria has become too broke to fund the subsidies.

But bitter enders, the Government has held on to one of the policies that have done the greatest damage to the Nigerian economy and facilitated massive corruption – selective allocation of subsidised foreign exchange.

A gap of N7 now exists between the official CBN and parallel market dollar rates. As usual, this provides an opportunity to make massive illicit gains and deters investment.

More importantly, it is a sign that despite everything, Nigeria is not ready to spring from the trap it set for itself in the 1970s. Without the courage to wean its economy from volatile oil prices, the country will remain stuck in the circle of boom and burst.

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Abimbola Agboluaje

Abimbola is Managing Director of WNT Capitas . He consults on strategic communications and investment risk.

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  1. Will Buhari set Nigeria free?
    How is that ever going to be possible? This is an endeavour that should ordinarily stretch brilliant minds to the limit. Pray, where would ordinary Buhari begin?
    Any mumu can seek loans and spend the proceeds.

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