Eneojo Herbert
The removal of fuel subsidies in Nigeria, while long-debated, became a reality in 2023 under President Bola Tinubu’s administration. This decision signaled a profound shift in the nation’s economic landscape, rippling through various sectors, particularly agriculture. In a country where over 60% of the population is directly involved in farming, understanding the multiplier effect of this policy change on agricultural produce becomes essential. While advocates of subsidy removal argue for fiscal prudence and economic growth, the immediate and long-term effects on the agricultural value chain need to be closely examined, particularly in light of Nigeria’s aspiration for food security.
Fuel Subsidy: A Brief Overview
Fuel subsidies were introduced in Nigeria to keep fuel prices affordable for the population by compensating marketers to offset the gap between global crude oil prices and the local retail price. This policy was seen as necessary to protect Nigerians from high fuel prices, especially considering the country’s dependence on fuel for transportation, electricity generation, and industrial activities.
However, fuel subsidies became economically unsustainable over time. They cost the Nigerian government trillions of naira annually, led to inefficiencies, and encouraged smuggling and corruption within the petroleum sector. With dwindling government revenues, worsened by fluctuating global oil prices and high debts, the removal of subsidies became inevitable.
Impact on Agricultural Produce: Direct and Indirect Costs
Agriculture is inherently energy-intensive. From powering farm equipment and irrigation systems to transporting produce from farms to markets, energy in the form of fuel plays a pivotal role at every stage of the agricultural value chain. When the fuel subsidy was removed, the immediate impact was a sharp increase in the cost of fuel, which in turn escalated operational costs for farmers.
- Cost of Transportation
One of the most immediate effects of the subsidy removal is the increase in transportation costs. Nigeria’s agricultural system is largely decentralized, with many farms located in rural areas far from urban markets. Transporting farm inputs (such as seeds, fertilizers, and pesticides) and outputs (harvested crops and livestock) requires fuel-dependent vehicles. As fuel prices rise, transporters hike their fees, which gets passed down the value chain to consumers. This leads to a rise in the cost of food, making it more expensive for Nigerians, particularly those in urban areas, to access agricultural produce. - Increased Cost of Farm Inputs
Fuel is used extensively in the production and distribution of farm inputs such as fertilizers and pesticides. With the removal of the subsidy, manufacturers and distributors of these inputs face increased operational costs. Farmers, in turn, bear the brunt of these costs, particularly smallholder farmers who constitute the bulk of Nigeria’s agricultural producers. The rise in input costs reduces the profitability of farming, discouraging investment in new technology or practices that could increase yields. Consequently, farmers may reduce the scale of their operations, leading to reduced output and further exacerbating food shortages. - Mechanization and Irrigation
Mechanized farming, which relies on tractors, harvesters, and other fuel-powered machinery, has been promoted as a means of increasing agricultural productivity in Nigeria. However, with higher fuel prices, mechanized farming becomes costlier, pushing many farmers to rely on manual labor, which is less efficient and more time-consuming. Similarly, irrigation systems that require fuel to pump water become more expensive to operate, particularly during dry seasons when irrigation is essential to maintaining crop yields. The increased cost of mechanization and irrigation, in the long run, threatens productivity and leads to inefficiencies that stifle agricultural growth. - Post-Harvest Losses
Post-harvest losses have long been a problem in Nigeria’s agricultural sector, and the removal of fuel subsidies threatens to aggravate this challenge. Many smallholder farmers do not have access to storage facilities, relying on quick transportation to markets or processing facilities to prevent spoilage. With higher transportation costs, delays in moving produce from farms to markets or processors become more frequent, leading to higher rates of spoilage. This further reduces the availability of agricultural produce in the market, pushing prices even higher and contributing to food insecurity. - Impact on Agro-Processing
Agro-processing industries, which convert raw agricultural produce into finished or semi-finished products, are also significantly affected. These industries often rely on diesel-powered generators due to Nigeria’s unreliable electricity supply. With the removal of the fuel subsidy, diesel prices have surged, increasing the operational costs of these industries. Consequently, agro-processors may pass on these increased costs to consumers, further contributing to the inflationary spiral in food prices. Additionally, higher costs could lead to reduced production, loss of jobs in agro-processing, and stunted growth in value addition activities that are crucial for boosting the agriculture sector’s contribution to Nigeria’s GDP.
Long-Term Consequences: A Threat to Food Security
The most significant long-term consequence of subsidy removal on agriculture is its potential impact on food security. Nigeria is already grappling with food shortages due to a combination of climate change, insecurity in farming regions, and poor infrastructure. By increasing production and transportation costs, the subsidy removal further strains the capacity of farmers to produce and distribute food efficiently. Rising prices make nutritious food unaffordable for many Nigerians, leading to malnutrition and increasing poverty levels.
Moreover, as the cost of living rises and farming becomes less profitable, some farmers may abandon agriculture altogether, particularly young people who might seek more lucrative opportunities in urban centers or other industries. This rural-to-urban migration threatens to depopulate rural farming communities, leading to a further decline in agricultural productivity.
Potential Positive Outcomes
Despite the immediate challenges, proponents of the subsidy removal argue that the policy could yield long-term benefits for the agricultural sector and the Nigerian economy as a whole. By freeing up government funds previously spent on subsidies, there is potential for reinvestment in critical areas such as infrastructure, education, and healthcare, which could indirectly benefit the agricultural sector. For instance, improved rural roads could lower transportation costs in the long term, while better access to finance and technology could boost productivity.
Additionally, the removal of subsidies may encourage private sector investment in the energy and agricultural sectors, fostering innovation in alternative energy sources for agriculture, such as solar-powered irrigation systems. Over time, the increased competition in the energy market could lead to lower fuel prices, providing relief to farmers.
Mitigation Strategies: Policies for Agricultural Resilience
To mitigate the negative effects of the fuel subsidy removal, the Nigerian government needs to implement targeted policies that support the agricultural sector. These could include:
Subsidies for Farm Inputs: While fuel subsidies may no longer be feasible, the government could offer targeted subsidies for farm inputs such as fertilizers, seeds, and machinery to help farmers cope with rising costs.
Investment in Renewable Energy: Promoting the use of renewable energy, such as solar-powered irrigation and storage systems, could reduce farmers’ dependence on fuel, lowering their production costs and boosting productivity.
Improving Rural Infrastructure: Investing in rural infrastructure, particularly roads, can help reduce transportation costs and minimize post-harvest losses, ensuring that more produce reaches markets in good condition.
Access to Credit: Expanding farmers’ access to affordable credit would enable them to invest in technology and practices that improve productivity and mitigate the impact of rising operational costs.
Conclusion
The removal of fuel subsidies in Nigeria has undeniably increased the cost of agricultural production, with far-reaching consequences for food prices, farm profitability, and national food security. However, with careful policy interventions and investments in key areas, the Nigerian agricultural sector could adapt to these changes and emerge more resilient. By addressing the challenges posed by rising costs and encouraging innovation, Nigeria can ensure that its farmers continue to feed the nation while contributing to broader economic growth.
