The recent removal of fuel subsidies in Nigeria and the accompanying surge in fuel prices has become a subject of intense debate. The policy, prescribed by the World Bank and the International Monetary Fund (IMF), was introduced as a means of curbing government spending and stimulating economic reform. However, the consequences have been severe, leading to an immediate increase in inflation, a rise in the cost of living, and a deepening of the poverty crisis. Nigeria, already grappling with significant economic challenges, now finds itself on a path that many other nations have treaded, often to disastrous outcomes.
The Double Standard of Bretton Woods Institutions
What strikes many as glaring hypocrisy is the fact that while Nigeria, and much of the developing world, is pressured by Western institutions to remove subsidies, those same Western economies continue to subsidize their industries in one form or another. Take the U.S., for example: both Republican and Democratic administrations have historically ramped up spending and subsidies, especially during times of crisis. According to the Committee for a Responsible Federal Budget, President Trump approved $8.4 trillion of new ten-year borrowing during his term, with significant portions directed toward COVID relief, and President Biden has so far approved $4.3 trillion in new borrowing. The lesson here is simple: even the wealthiest nations find ways to subsidize their economies to ensure growth and stability, recognizing that austerity measures are often counterproductive.
In China and Russia—two countries that have experienced tremendous growth—state subsidies have played a key role in economic expansion. Infrastructure, education, healthcare, and energy are all areas that have seen significant state investment, leading to improvements in productivity and economic growth. These subsidies are not mere giveaways but strategic investments that propel national development and enhance global competitiveness. So why, then, are developing countries like Nigeria told that subsidy removal is the only path forward?
Nigeria’s Path to Growth: Subsidies and Economic Expansion
Rather than relying on austerity and subsidy removal to balance the budget, Nigeria must pursue an alternative strategy focused on economic growth and boosting productivity. Removing subsidies, especially in a country where the majority of people live below the poverty line, is akin to pulling the rug out from under the feet of the most vulnerable.
The key to a prosperous Nigerian economy lies in stimulating growth, not in imposing cuts. The IMF and World Bank often fail to recognize that austerity measures shrink economies, reduce demand, and cripple productivity. When fuel prices are artificially inflated, the cost of transportation, goods, and services also rises. This creates a vicious cycle where businesses struggle to operate, unemployment increases, and poverty deepens.
Instead of shrinking the economy through austerity, Nigeria should focus on boosting its productive sectors. This can be achieved through a robust infrastructure investment plan, aimed at improving the agricultural, manufacturing, and technology sectors. Nigeria boasts vast arable land, abundant natural resources, and a youthful population with untapped potential. Investing in these areas can generate jobs, spur innovation, and stimulate sustainable economic growth.
In this regard, Nigeria can learn from the United States, particularly from the policies enacted in Democratic-controlled cities. Most of the top-ranked universities and largest cities in the U.S. are run by Democrats, whose policies focus on building public infrastructure, expanding opportunities, and creating value through strategic government spending. High taxes are imposed, but the returns in public services and infrastructure improvements help drive economic growth. The same principles can apply in Nigeria: public investments in infrastructure and human capital development can yield long-term dividends that far outweigh the short-term savings from subsidy removal.
A Case Study: Argentina’s Failed Austerity Experiment
Argentina offers a cautionary tale. The recent removal of critical subsidies in Argentina has plunged more than half of the country’s 46 million people into poverty. The new right-wing government’s austerity measures, aimed at reining in deficits, have worsened living conditions for the poor and undermined social stability. The parallels to Nigeria’s current situation are clear: removing subsidies without addressing underlying economic issues such as corruption and inefficiency leads to a greater divide between the rich and the poor, and the destruction of what little social safety nets remain.
The Islamic economist, in reviewing such a scenario, asks a fundamental question: How can we promote equity and justice in the economy if the most vulnerable bear the brunt of economic restructuring? In Islamic economic philosophy, justice (‘adl) is paramount, and policies that exacerbate poverty and inequality are inherently flawed.
The Flawed Premise of Austerity in Africa
Nigeria’s removal of fuel subsidies is a textbook example of Western-style austerity being applied in an African context, with little regard for the socioeconomic realities on the ground. The argument that subsidy removal will free up funds for infrastructure and other public goods is misleading, given the deeply entrenched corruption in the system. The real issue is not subsidies themselves but the corruption and inefficiency that distort their implementation.
For decades, fuel subsidies in Nigeria have served as a lifeline for the majority of the population. While critics argue that these subsidies have fostered corruption and inefficiency, their removal without adequate reforms to address systemic issues has led to more harm than good. Prices for essential goods and services have skyrocketed, placing an unbearable burden on ordinary Nigerians.
It is important to note that subsidy removal has not worked as a standalone policy in any country. Argentina’s economic collapse, as highlighted earlier, is a clear example. There is no historical record of any country that successfully eradicated poverty and stimulated sustainable economic growth by simply removing critical subsidies. What is needed instead is a balanced approach that focuses on tackling the underlying corruption and inefficiencies in subsidy administration while maintaining a safety net for the most vulnerable segments of society.
Islamic economics promotes the idea of a welfare state—one in which the government plays an active role in ensuring that the basic needs of all citizens are met. This includes providing subsidies for essential goods and services like fuel, healthcare, and education. The role of the state in this model is to facilitate equitable distribution of resources, ensuring that the poor and vulnerable are not left behind in the pursuit of economic growth.
Indeed, subsidies are not inherently bad. In fact, they can be powerful tools for poverty alleviation, economic stability, and growth if managed transparently. What is bad is the corruption that skews the benefits of these subsidies toward the elite, leaving the masses with little to no relief. This is where the Islamic perspective emphasizes accountability (muhasabah) and good governance (al-hukm al-salih).
A Path Forward for Nigeria:
- Reforming Subsidy Management, Not Abolishing It: Nigeria must focus on fixing the corrupt mechanisms that allow subsidies to benefit a few at the expense of the many. A transparent and accountable subsidy system that targets the most vulnerable can serve as a buffer against the rising cost of living and stimulate economic growth. Islamic principles of governance call for honesty, transparency, and the eradication of corruption. If these values are applied, subsidies could be restructured rather than eliminated.
- Diversifying Revenue Streams: The reliance on petroleum as Nigeria’s primary source of revenue is unsustainable. The Islamic economist advocates for risk-sharing and diversification, encouraging investments in agriculture, technology, and other productive sectors. This approach aligns with the Islamic economic principle of tawazun (balance), where multiple sectors contribute to economic prosperity, reducing dependency on any one sector and providing stability in times of crisis.
- Investing in Human Capital: Instead of burdening citizens with higher fuel prices, the government should prioritize investments in education, healthcare, and job creation. This will enable individuals to lift themselves out of poverty and contribute to the economy. The principle of maslahah (public interest) in Islamic economics stresses the importance of policies that benefit the wider society.
- Islamic Financing Alternatives: Islamic finance offers alternatives to the traditional interest-based borrowing that often leads to crippling debt. Instruments like sukuk (Islamic bonds) and waqf (endowments) can be used to fund infrastructure projects and social services without placing undue financial burdens on future generations.
Growth, Not Austerity, Is the Solution
The removal of fuel subsidies in Nigeria is a shortsighted policy that fails to address the core issues plaguing the economy. While the government may believe that it is balancing the budget, it is, in fact, deepening poverty and stifling economic growth. The lesson from Argentina and other countries that have implemented similar policies is clear: austerity measures do not work.
Nigeria must pursue a growth-oriented strategy that focuses on boosting productivity, improving infrastructure, and investing in human capital. By tackling corruption in the subsidy system and adopting Islamic economic principles of justice and equity, Nigeria can create a more prosperous and inclusive economy. The Bretton Woods institutions’ one-size-fits-all approach to economic reform is flawed, and Nigeria must chart its own path—one that prioritizes the welfare of its people above all else.
