POLICY AND DEVELOPMENT ISSUES IN NIGERIA

CHAPTER TWO

IMPACT OF FUEL SUBSIDY REMOVAL ON

SMALL AND MEDIUM SCALE ENTERPRISES
(SMEs) IN OTUKPO LOCAL GOVERNMENT
AREA, BENUE STATE
Sunday Ozuma Ozuma
Department of Sociology, Benue State University,
Makurdi, Benue State-Nigeria

Correspondence: sundayozuma2017@gmail.com

Abstract
The removal of fuel subsidies has been a controversial issue in
Nigeria. The study examined the impact of fuel subsidy removal
on small- and medium-scale enterprises (SMEs) in the Otukpo
Local Government Area, Benue State. The study adopted rational
choice theory. A survey research design was used, and 400
respondents were selected via cluster and simple random sampling
techniques. Data were collected via a questionnaire instrument.
Descriptive statistics such as simple percentages and frequency
tables were used for data analysis. The findings of this study
revealed that the removal of fuel subsidies affected business
income and profit margins as a result of poor income and profit
generation by SMEs. Additionally, fuel subsidy removal has a
negative effect on the operating cost of SMEs and leads to high
inflation and price hikes of goods and services, which make it
difficult for SMEs to purchase goods for their business. The
following recommendations were made: the government should
provide financial and regulatory support to SMEs, such as loans
and grants, to help them; the government should diversify the
economy to reduce dependence on oil revenue, which can be
accomplished by developing other sectors, such as agriculture,
manufacturing, and technology, for alternative sources of income.

Keywords: Fuel Subsidy Removal, Economy, SMEs, Inflation,

Operation Cost
25
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

1. Introduction
Fuel subsidy removal has been a controversial issue in Nigeria for
decades. In Nigeria, fuel subsidies were first introduced in the 1970s
as a response to the oil price shock in 1973 (Houeland, 2020). Fuel
subsidies are a policy that aims to alleviate the burden of rising
petroleum products on citizens and businesses, particularly SMEs,
which form the backbone of the Nigerian economy. However, the
removal of fuel subsidies has been a controversial issue in Nigeria for
decades given the socioeconomic consequences that it may have on
the masses and businesses, especially SMEs. SMEs are the lifeblood
of any economy, especially in developing countries such as Nigeria;
they create jobs, contribute to economic growth, and reduce poverty.
These enterprises operate in agriculture, manufacturing, retail and
services, providing essential goods and services to both urban and
rural communities (Houeland, 2020).
Fuel subsidies have been implemented to stabilize fuel prices,
control inflation and ease the financial burden on citizens. For SMEs,
fuel subsidies help reduce their operating cost, making transportation
more affordable and facilitating distribution activities (Ude, 2023).
The Nigerian government has periodically grappled with the issue of
fuel subsidy removal because of the immense strains it places on the
country’s finances. Consequently, in recent years, economic
challenges have necessitated the removal of fuel subsidies. On May
29, 2023, President Bola Tinubu announced in his inaugural speech
that fuel subsidies were scrapped as part of his economic reform
agenda. He argued that the subsidy was unsustainable and inefficient
and that the funds saved from it would be invested in public
infrastructure and social welfare (Ozili, 2023).
According to Evans et al. (2023), the structure of Nigeria's
subsidy system involves fixing the price of petrol for consumers below
international prices and using government resources to cover the
difference. Given that Nigeria's refineries are in a state of decay,
imported oil prices tend to be higher than they would be if the products
were refined domestically. This structural issue has contributed to the
perceived unsustainability of the subsidy programme. The decision to

26
Impact
POLICYofAND
Fuel Subsidy Removal on
DEVELOPMENT Small IN
ISSUES andNIGERIA
Medium Scale … S. O. Ozuma

raise the price of petrol by 200% shortly after the subsidy removal
announcement underscores the immediate impact on consumers,
SMEs and the broader economy (Ude, 2023). While subsidy removal
is driven by the intent to align with global trends of fossil fuel subsidy
reduction and enhance fiscal sustainability (Ude, 2023), it presents a
host of challenges. Foremost among these challenges is the potential
exacerbation of socioeconomic inequality, given that subsidy removal
can lead to increased fuel prices and a subsequent rise in the cost of
living. This predicament echoes the concern raised by Ude (2023),
emphasizing that while subsidy elimination might have long-term
benefits, it can strain the financial resources of households and small-
and medium-scale businesses, particularly those already
marginalized. The complexity of the problem is magnified by the
dynamic interplay between economic, political, environmental, and
societal factors (Ozili, 2023).
Small and medium-sized enterprises are facing many setbacks
as a result of the change in fuel subsidy removal. Fuel subsidy removal
would lead to an increase in the price of essential goods and services.
As a result, there would be less disposable income in the hands of
individuals and small businesses due to rising prices, stagnant wages,
and a fixed national minimum wage. This would lead to a reduction
in consumption expenditure and potentially act as a drag on aggregate
demand. The reduction in consumption would translate to weak
consumer demand for the goods and services produced by firms. This,
in turn, could decrease economic output and gross domestic product
and slow the rate of economic growth (Evans et al 2023).
SMEs are vulnerable to external shocks and policy changes,
such as the removal of the fuel subsidy, owing to their low capital
base, limited access to credit, poor infrastructure and weak
institutional support. This could reduce their profitability,
competitiveness and sustainability and consequently affect their
contribution to poverty reduction and economic development. In view
of the above, this study seeks to examine the impact of fuel subsidy
removal on SMEs in the Otukpo local government area.

27
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

Statement of the Research Problem

Fuel subsidies have traditionally been a double-edged sword in
Nigeria. While intended to ease the financial burden on the
government and stimulate economic growth, its removal has triggered
a negative effect on the cost of living. One of the most immediate and
tangible consequences is the surge in fuel prices, which directly
affects manufacturing and transportation costs and small- and
medium-scale enterprises. Owing to fuel subsidy removal,
manufacturing costs as well as transportation costs are affected. These
subsequently cause a spike in the prices of essential goods. This ripple
effect is especially challenging for low-income earners, who allocate
a significant portion of their income to basic necessities.
Moreover, the removal of fuel subsidies has contributed to
inflationary pressures, making the overall economic landscape more
challenging for average citizens. Inflation erodes the purchasing
power of consumers, making it harder for individuals and families to
meet their basic needs. This situation becomes more pronounced for
vulnerable populations, amplifying existing socioeconomic
disparities. In Benue State and Otukpo local government areas, fuel
subsidy removal has crippled so many SMEs and business sectors.
With the removal of the fuel subsidy, SMEs face many challenges,
ranging from increasing operating cost to supply chain disruption, a
decrease in profit margins and inflationary pressure. Furthermore,
they face competition from large corporations, leading to market share
erosion and limited growth opportunities for SMEs.
There are several studies on fuel subsidy removal in Nigeria
(Onyishi et al., 2012; Majekodunmi, 2013; Adeoti et al., 2016; and
Evans et al., 2023). However, none of these studies were carried out
in the Otukpo Local Government Area, Benue State, to examine the
impact of fuel subsidy removal on SMEs; hence, there is a gap in
knowledge. Therefore, this research intends to fill this gap. This study
therefore examines the impact of fuel subsidy removal on SMEs in the
Otukpo Local Government Area, Benue State. In doing so, the study
attempted to answer the following questions: What is the effect of fuel
subsidy removal on the income and profit margins of SMEs?

28
Impact
POLICYofAND
Fuel Subsidy Removal on
DEVELOPMENT Small IN
ISSUES andNIGERIA
Medium Scale … S. O. Ozuma

Objectives of the Study

The broad objective of this study is to examine the impact of fuel
subsidy removal on small- and medium-scale enterprises (SMEs) in
the Otukpo local government area, Benue State. The specific objective
is as follows:
i. examines the effect of fuel subsidy removal on the income and
profit margin of SMEs in the Otukpo local government area.

Research Hypotheses
H0 Fuel subsidy removal has no significant effect on SMEs in the
Otukpo local government area.

2. Literature Review
Conceptual Clarification
Fuel Subsidy: Fuel subsidies are a government policy in which the
government provides financial assistance to reduce the cost of fuel for
consumers. This is typically done by selling fuel at a price lower than
the market rate, with the government covering the price difference
through subsidies. The main goals of fuel subsidies are to make fuel
more affordable for citizens and to stabilize domestic prices.
However, fuel subsidies can have economic, environmental, and fiscal
implications, as they often lead to increased government spending and
can encourage the consumption of fuel (Iroanusi, 2021).

Fuel Subsidy Removal: Fuel subsidy removal refers to the

government's decision to eliminate or reduce subsidies for petroleum
products, such as gasoline and diesel. This can have significant
economic and social implications (Ilodigwe, 2023). Fuel subsidy
removal is the situation where the government lifts the subsidization
of petrol prices they have been allocating to petrol refining. Fuel
subsidy removal is driven by promoting economic and social policy
objectives. The subsidy has always been a part of the Nigerian story,
which makes it difficult to eliminate completely. In Nigeria, fuel
subsidies were first introduced in the 1970s as a response to the oil
price shock in 1973. Fuel subsidies were partially removed in 1986.

29
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

Since then, fuel subsidies have been in place (Ilodigwe, 2023). In

2012, the government abruptly removed the fuel subsidy. The removal
led to massive protests, which were intended for the government to
reinstate the fuel subsidy it had removed. The government
subsequently reinstated fuel subsidies in 2012 because of the massive
protests. Since then, fuel subsidy payments in Nigeria have grown
enormously. In 2022, fuel subsidies reached ₦4 trillion (US$6.088
billion), which amounted to 23% of the national budget of ₦17.126
trillion (US$25.87 billion) in 2022. As a result, Nigeria could no
longer sustain fuel subsidies in 2023, and the government announced
that fuel subsidies would be removed in June 2023 (Evans et al 2023).
The chronology of events and reactions surrounding the 2023
fuel subsidy removal in Nigeria paints a complex picture of economic,
political, and societal dynamics. The announcement of the subsidy's
removal during President Bola Ahmed Tinubu's inauguration set off a
chain reaction that elicited public outcry and governmental responses
(Ude, 2023). Slated to take effect on July 1, 2023, the policy prompted
immediate concerns and chaos, with citizens scrambling to purchase
fuel before prices surged. This subsidy removal was intricately linked
to fuel prices and consequently influenced the costs of almost all
goods and services within the nation (Ude, 2023).

Small and Medium Scale Enterprises (SMEs): Compared with

large corporations, SMEs are businesses that have a limited number
of employees and less financial turnover. The specific definition of an
SME varies by country and industry but generally falls within these
parameters: employee size, which can typically be less than 500
employees, with some countries using lower thresholds (250 or even
50) and financial metrics where revenue, assets, or a combination of
both may be considered, with upper limits varying by country and
industry (Kadiri, 2012).
The Small and Medium Enterprises Development Agency of
Nigeria (SMEDAN) defines SMEs in Nigeria as enterprises with a
staff strength of not less than 10 and not more than 249 and an annual
turnover of not less than five million naira (₦5,000,000) and not more
than one billion naira (₦1,000,000,000). Similarly, the International
30
Impact
POLICYofAND
Fuel Subsidy Removal on
DEVELOPMENT Small IN
ISSUES andNIGERIA
Medium Scale … S. O. Ozuma

Finance Corporation (IFC) defines SMEs as enterprises that have

fewer than 250 employees and annual revenues of up to $15 million
(IFC, 2021). SMEDAN (2021) further categorizes SMEs into micro,
small and medium-sized enterprises on the basis of the number of
employees and turnover (Lawal and Ijaiya, 2007).
However, in Nigeria, the asset base criterion is more
commonly used. The Central Bank of Nigeria, in its 2005 guideline
on the Small and Medium Enterprise Investment Scheme (SMEIS),
described SMEs as any enterprise with a maximum asset base of 200
million naira (excluding land and working capital) with no lower or
upper limit of staff. Using quantitative indices alone to define SMEs
has proven unsatisfactory in many respects. This is because such
indices are characterized by periodic alterations due to inflation and
thus can sometimes be misleading (Jamil & Rapiah, 2011).

Impact of Fuel Subsidy Removal on SMEs

Fuel subsidy removal has historically been implemented to destabilize
fuel prices, increase inflation, and increase the financial burden on the
populace. For SMEs, fuel subsidy removal has helped increase
operating costs, making transportation more unaffordable and
ensuring the unavailability of energy at a reasonable price for
production and distribution activities. The Nigerian government has
periodically grappled with the issue of fuel subsidy removal because
of the immense strain it places on the country's finances. In recent
years, economic challenges have necessitated discussions on subsidy
reduction or elimination. While the removal of subsidies can lead to
fiscal relief, it also triggers a series of economic repercussions,
especially for SMEs (Edet, 2023). According to Edet (2023), fuel
subsidy removal has affected SMEs in many ways, as SMEs face a
series of challenges because fuel subsidy removal is embarked upon
by the Nigerian government. Some of these impacts are as follows:
i. Increased operating costs: With the removal of fuel subsidies,
SMEs face a direct impact on transportation costs. Higher fuel
prices result in increased expenses for transporting goods and
materials, directly affecting profit margins and pricing strategies.
In Nigeria, the price of petrol is considered a major driver of the
31
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

cost of living, as it is used by all businesses, including small

businesses and many households, given the unstable electricity
supply. Therefore, any increase in fuel price could directly and
immediately impact the prices of goods and services across the
country. When petrol prices increase, small businesses tend to
increase their prices to cover the increased cost of operation,
which can lead to higher prices for consumers. This can make it
more difficult for people to afford basic necessities, lead to a
decrease in the standard of living and contribute to poverty and
inequality.
ii. High inflation and reduced purchasing power: The rise in
transportation costs often cascades into a broader inflationary
trend. As fuel prices surge, the cost of living increases, leading to
reduced purchasing power for consumers. SMEs may face reduced
demand for their products and services, affecting overall sales.
The removal of the fuel subsidy led to a rise in the price of petrol
from a subsidized price (Evans et al, 2023). The implication is that
the price of most consumer and industrial goods, which are
produced or transported with petrol, has increased sharply. The
cost of bread has increased, and the cost of local transportation has
also increased, making it expensive to afford for poor individuals
and low-income earners. The effect will also be felt by both the
rich and the poor, but as always, the poor will suffer the most
through a significant reduction in their purchasing power
(Mohammed, Ahmed and Adedeji, 2020).
iii. Supply chain disruptions: SMEs rely heavily on supply chains
to source raw materials and distribute finished products. Fuel price
fluctuations can disrupt supply chains, leading to delays, higher
logistical expenses, and difficulties in meeting customer demands.
iv. Competition with large corporations: SMEs, which already
operate on relatively narrow margins, face intense competition
from larger corporations that can absorb increased fuel costs more
effectively. This competition can lead to market share erosion and
limited growth opportunities for SMEs.

32
 Impact
POLICYofAND
Fuel Subsidy Removal on
DEVELOPMENT Small IN
ISSUES andNIGERIA
Medium Scale … S. O. Ozuma

v. Job loss and the shutdown of business: The economic

challenges caused by fuel subsidy removal may force some SMEs
to downsize or halt expansion plans. Consequently, this can lead
to job losses and increased unemployment in the country. The
removal of fuel subsidies leads to job loss in the informal sector,
which relies mostly on PMSs or petrol (Houeland, 2020). The rise
in petrol prices would lead to the shutdown of small businesses
that cannot afford the rising cost of petrol and whose profit
margins have been completely eroded by fuel subsidy removal in
the formal sector.
vi. Decrease in economic growth in the short term: Fuel subsidy
removal would lead to an increase in the price of essential goods
and services. As a result, there would be less disposable income in
the hands of individuals and small businesses due to rising prices,
stagnant wages, and a fixed national minimum wage (Edet, 2023).
This will lead to a reduction in consumption expenditure and act
as a drag on aggregate demand. The reduction in consumption
would translate to weak consumer demand for the goods and
services produced by firms. This, in turn, could decrease economic
output and gross domestic product and slow the rate of economic
growth (Houeland, 2020).
vii. Increases in poverty and vulnerability: The removal of fuel
subsidies increases poverty in the short term (Raji, 2018). This can
lead to immediate pain and hunger for families. The poor and
middle-class consumers will witness a decrease in their
purchasing power, and small businesses will find their profit
margins squeezed because they will face higher costs and reduced
sales volumes. If they attempt to pass on the cost to consumers,
consumers might refuse to buy, or they may reduce the quantity
purchased, thereby leading to low business patronage.
Furthermore, fuel subsidy removal could disproportionately affect
poor vulnerable groups if there are no economic safety nets or
social assistance programs that can alleviate the economic
hardship caused by fuel subsidy removal (Evans et al, 2023).

33
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

Theoretical Framework
This study adopts rational choice theory as its theoretical framework.
Rational choice theory originated during the late 18th century with the
work of Cesare Beccaria. Rational choice theory was anchored by
James Coleman in 1990. The central explanation of this theory is a
focus on an individual’s rational action that helps explain aggregate
behavior in society. According to the main proponents of this theory,
James Coleman (1990), the main task of sociologists is to focus on the
social system, but such macro phenomena must be explained by
examining the factors internal to them, which centers on the behavior
of individuals at the micro level.
The main argument in rational choice theory is that individuals
gauge their choice of action on the basis of each option's capacity to
yield advantages, pleasure, and happiness. Rational choice provides
an in-depth perspective on why individuals decide to participate in
specific activities; people choose to exhibit a behavior for
fundamental reasons (Shon, 2015). Essentially, behaviors that are
rewarding, easy, satisfying, and fun stimulate the pleasure-seeking
aspects of an individual. The central foundation of this theory,
however, is that the majority of society is filled with people who are
rational beings who fear punishment and can be controlled by that
fear.
Rational choice theory hypothesizes that actors are sensible
individuals who make decisions to carry out action on the basis of the
costs and benefits involved (Liu, 2017). Rational choice theory posits
that individuals act to maximize their self-interest within constraints
(Van Valkengoed & Van der Werff, 2022). In the context of subsidy
removal, this theory can explain how consumers react to price
increases by altering their consumption patterns. Data from Nigeria's
2012 subsidy removal protests revealed shifts in consumer behavior
due to sudden fuel price hikes (Apeloko & Olajide, 2012).
Rational choice theorists posit that individuals make decisions
on the basis of rational calculations aimed at maximizing their self-
interest. Applied to subsidy removal, this theory explains the
government's motivation to eliminate subsidies due to their
unsustainable fiscal burden. The escalating subsidy payments, as
34
Impact
POLICYofAND
Fuel Subsidy Removal on
DEVELOPMENT Small IN
ISSUES andNIGERIA
Medium Scale … S. O. Ozuma

evidenced by the increasing yearly figures, indicate a rational response

to mitigate economic strain. The decision aligns with the government's
self-interest in achieving fiscal sustainability, addressing long-term
budgetary concerns, and attracting investment by creating a favorable
economic environment. Additionally, this theory underscores citizens'
rational behavior in coping with higher fuel costs. As fuel prices rise
after subsidy removal, individuals are likely to adapt their
transportation choices and energy consumption patterns to minimize
personal financial impact, aligning with the theory's assumption.

3. Methodology
The study adopted a survey research design. The study area of the
research is the Otukpo local government area of Benue State. Otukpo
comprises 13 council wards. The economy of Otukpo is basically
agrarian in nature. The Otukpo local government is so endowed with
business activities and SMEs all over the local government area. The
study population was made up of 400 SMEs drawn from 4 districts
(Otukpo, Akpa, Ugboju and Adoka) within the study area selected via
Taro Yamane sample size determination. The study adopted a
multistage sampling procedure (cluster and simple random sampling).
This will be done in stages; in the first stage, the researcher divides
the four (4) districts in Otukpo into clusters. These districts are
Otukpo, Akpa, Ugboju and Adoka. In the second stage, a simple
random sampling technique was applied. In doing so, the researcher
moved around in the selected districts one after the other and wrote all
the 1650 licensed SMEs on a piece of paper differently and put it
inside a basket. The researcher then randomly selected 100 SMEs each
from the 4 districts out of the 1650 SMEs by picking 400 papers from
the basket. The managing directors and CEOs of these SMEs were
sampled and constitute the respondents for the study.
The data were collected via questionnaires. A quantitative
method of data analysis was used for this study. The data collected for
the study were collated and analyzed via the Statistical Package for
Social Sciences (SPSS) version 26. The results are presented via
frequency distribution tables and simple percentages, and the findings
are discussed. The hypothesis of the study was tested with a chi-square
statistical tool.
35
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

4. Results and Discussions

Sociodemographic Attributes of the Respondents
This section presents the sociodemographic attributes of the
respondents, which include sex, age, marital status, occupation,
education qualification and religion. This study administered 400
questionnaires to the respondents. However, only 394 questionnaires
were returned and analyzed.
The data in Table 1 below revealed that (287) 72.8% of the
respondents were males, whereas (107) 27.2% of the respondents
were females. This implies that the research was dominated by male
respondents. In terms of the age distribution of the respondents (48),
12.2% were within the age range of 18--23 years, (90) 22.8% were
between the ages of 24--29 years, (254) 64.5% were within the age
range of 30--34 years and (2) 0.5% were within the age range of 35--
40 years. The age range of 30--34 years was therefore most
represented in the present study. In terms of marital status, (35) 8.9%
of the respondents were single, (342) 86.8% were married, (5) 1.3%
of the respondents were divorced/widowed, and (12) 3.0% of the 394
respondents were separated. This implies that the majority of the
respondents were married. In terms of occupation, (9) 2.3% of the
respondents were farmers, (2) 0.5% of the respondents were civil
servants, (302) 76.6% of the respondents were businesses, and (81)
20.6% of the respondents were students. This implies that the majority
of the respondents were students and that some engaged in business.
The educational qualification data above indicated that 16 (4.1%) of
the respondents had nonformal education, 35 (8.9%) had primary
education (FSLC), 135 (34.3%) had secondary education (SSCE), and
208 (52.8%) had tertiary education (Bachelor’s degree/HND). This
indicated that the respondents had basic education and that those with
tertiary education were mostly represented, which is important for the
study because their responses are likely well cultured. With respect to
the religious affiliation of the respondents, (351) 89.1% of the
respondents were Christians, (35) 8.9% of the respondents were
Muslims and (8) 2.0% of the respondents were traditionalists. It can
therefore be deduced that the opinions from this research are
dominated by Christians.
36
Impact ofAND
POLICY FuelDEVELOPMENT
Subsidy Removal ISSUES
on SmallIN
and Medium Scale …
NIGERIA S. O. Ozuma

Table 1: Distribution of Respondents according to their

Sociodemographic Attributes
Variables Frequency (N=394) Percentage (%)
Sex
Male 287 72.8
Female 107 27.2

Age (Years)
18-23 48
24-29 90 12.2
30-34 254 22.8
35-40 2 64.5
0.5
Marital Status
Single 35 8.9
Married 342 86.8
Divorced/Widowed 5 1.3
Separated 12 3.0

Occupation
Farming 9 2.3
Civil servant 2 0.5
Business 302 76.6
Student 81 20.6

Educational Qualification
Nonformal education 16 4.1
Primary education 35 8.9
Secondary education 135 34.3
Tertiary education 208 52.8

Religious Affiliation
Christian 351 89.1
Muslim 35 8.9
Traditionalist 8 2.0

Source: Field Survey, 2024

37
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

Effects of Fuel Subsidy Removal on the Income and Profit Margin

of SMEs in the Otukpo Local Government Area
This section presents the effects of fuel subsidy removal on the income
and profit margins of SMEs. The data in Table 2 reveal that 18.8%
(74) of the respondents opined that the removal of fuel subsidies has
decreased the purchase of goods and services for their business, 18.0%
(71) of the respondents averred that the removal of fuel subsidies
generated high costs of resources and commodities in the market,
49.5% (195) of the respondents asserted that the removal of fuel
subsidies has caused poor generation of income and profit for their
business, and 13.7% (54) of the respondents opined that the removal
of fuel subsidies has increased their production cost. These findings
revealed that the removal of fuel subsidies affected the income and
profit margins of SMEs in the Otukpo local government area.

Table 2: Effects of Fuel Subsidy Removal on the Income and

Profit Margin of SMEs
Variables Frequency Percentage (%)
Decrease in purchase of goods
and service 74 18.8

High cost of resources and

commodities 71 18.0

Poor generation of income and

profit 195 49.5

Increase in production cost 54 13.7

Total 394 100
Source: Field Survey, 2024.

38
Impact
POLICYofAND
Fuel Subsidy Removal on
DEVELOPMENT Small IN
ISSUES andNIGERIA
Medium Scale … S. O. Ozuma

Impact of Fuel Subsidy Removal on SMEs in the Otukpo Local

Government Area
This section presents the impact of fuel subsidy removal on SMEs.
Table 3 indicates that 37.1% (146) of the respondents affirmed that
the removal of fuel subsidies increased the operating cost of SMEs,
24.4% (96) of the respondents reported that the removal of fuel
subsidies led to high inflation and price increases, 21.3% (84) of the
respondents reported that the removal of fuel subsidies led to job loss
and the shutdown of business, 11.7% (46) of the respondents reported
that the removal of fuel subsidies led to a decrease in the economic
growth of SMEs, and 5.6% (22) of the respondents reported that the
removal of fuel subsidies increased poverty and vulnerability. These
findings imply that the removal of fuel subsidies has an impact on the
operating cost of SMEs, alongside high inflation and price hikes.

Table 3: Impact of Fuel Subsidy Removal on SMEs

Variables Frequency Percentage (%)

Increased operating cost 146 37.1

High inflation and price hike 96 24.4
Job loss and shutdown of business 84 21.3
Decrease in economic growth 46 11.7
Increase poverty and vulnerability 22 5.6
Total 394 100
Source: Field Survey, 2024

Test of Hypotheses
This section tests the hypotheses of this study. The chi-square (x2)
statistical tool was used to test the hypotheses at the 0.05 profitability
level of significance, and the results are presented in Table 4.

39
 POLICY AND DEVELOPMENT ISSUES IN NIGERIA

Table 4: Chi-square (x2) test of the impact of fuel subsidy removal

on SMEs in the Otukpo local government area
Variables Observed Expected Df P value X2-cal X2-tab
Increased 4 0.05 116.000a 9.488
operating cost 146 78.8

High inflation
and price hike 96 78.8

Job loss and

shutdown of 84 78.8
business

Decrease in
economic 46 78.8
growth
Increase
poverty and 22 78.8
vulnerability
Total 394
2
(X = 116.000, Df= 4> P = 0.05 > 0.00)

Table 4 shows that the chi-square (X2) calculated value of 116.000 was
greater than the chi-square (X2) table value of 9.488, which was
checked at 0.05 of significance and at 4 degrees of freedom. The null
hypothesis was therefore rejected, and the alternative hypothesis was
accepted. This implies that fuel subsidy removal has a significant
effect on SMEs in the Otukpo local government area.

Discussion of Findings
The findings of this study are discussed simultaneously with the
objectives of the study. The findings indicate that fuel subsidies affect
the income and profit margins of SMEs, as they lead to poor
generation of income and profit. These findings are supported by the
findings of Uchenna (2023), who reported that the removal of fuel
40
Impact
POLICYofAND
Fuel Subsidy Removal on
DEVELOPMENT Small IN
ISSUES andNIGERIA
Medium Scale … S. O. Ozuma

subsidies automatically led to an increase in the price of fuel, which

directly led to an increase in the cost of production or rendering
services. Additionally, SMEs in Nigeria depend heavily on physical
distribution for their marketing, unlike large industries in
technologically advanced nations that adopt electronic online
marketing; hence, the removal of fuel subsidies increases their
marketing expenses, leading to a reduction in their profit. As a result
of fuel subsidy removal, SMEs may see their profit margins squeezed
as they absorb higher fuel costs or pass them on to consumers,
potentially impacting competitiveness (Uchenna, 2023). According to
Kolawole (2023), as cited in Vanguard Newspaper (2023), in the
aftermath of reforms in the petroleum and foreign exchange sectors of
the economy, small business owners reported significant losses in
their income and profit and setbacks in their operations as a result of
subsidy removal.
Additionally, the findings show that the removal of fuel
subsidies increases the operating cost of SMEs in the Otukpo Local
Government Area, alongside high inflation and price hikes. These
findings corroborated the findings of Edet (2023), who reported that
SMEs faced a series of challenges because fuel subsidy removal was
embarked upon by the Nigerian government. There is an increase in
the operating costs of businesses, especially the direct impact on
transportation costs. Higher fuel prices result in increased expenses
for transporting goods and materials, which directly affects profit
margins and pricing strategies. In Nigeria, the price of petrol is
considered a major driver of the cost of living, as it is used by all
businesses, including small businesses and many households, given
the unstable electricity supply. Therefore, any increase in fuel price
could directly and immediately impact the prices of goods and
services across the country. According to Mohammed, Ahmed and
Adedeji (2020), fuel subsidy removal also leads to high inflation and
price hikes. The rise in transportation costs often cascades into a
broader inflationary trend. As fuel prices surge, the cost of living
increases, leading to reduced purchasing power for consumers. SMEs

41
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

may face reduced demand for their products and services, affecting
overall sales.
Data on the test of hypotheses revealed that the chi-square (X2)
calculated value of 116.000 was greater than the chi-square (X2) table
value of 9.488, which was checked at 0.05 of significance and at 4
degrees of freedom. The null hypothesis was therefore rejected, and
the alternative hypothesis was accepted. This implies that fuel subsidy
removal has a significant effect on SMEs in the Otukpo local
government area.

5. Conclusion and Policy Recommendations

This study examined the impact of fuel subsidy removal on small- and
medium-scale enterprises (SMEs) in the Otukpo Local Government
Area, with specific objectives, to examine the effects of fuel subsidy
removal on the income and profit margins of SMEs in the Otukpo
Local Government Area. The study established that the removal of
fuel subsidies affected business income and profit margins as a result
of poor income and profit generation by SMEs in the Otukpo local
government area. Additionally, fuel subsidy removal has an impact on
the operating cost of SMEs and leads to high inflation and price
increases in goods and services, which make it difficult for some
SMEs to purchase goods for their business.
The following recommendations were made to help improve
the impact of fuel subsidy removal on SMEs:
i. The government should provide financial and regulatory support
to SMEs, such as loans, and grants to help them cope with the
increased operational cost.
ii. The government should diversify the economy and pursue
economic diversification strategies to reduce dependence on oil
revenue through the development of other sectors, such as
agriculture, manufacturing, and technology, to create alternative
sources of income and contribute to a more resilient economy.
iii. Stakeholders should collaborate with SME owners on the way
forward. Engage with stakeholders, including civil society
organizations, labor unions, and the private sector, to solicit input

42
Impact
POLICYof AND
Fuel Subsidy Removal on
DEVELOPMENT Small and
ISSUES Medium Scale …
IN NIGERIA S. O. Ozuma

and build consensus on the best way forward. Inclusive decision-

making processes can lead to more sustainable and widely
accepted solutions.
iv. The negative impact of fuel subsidy removal on SMEs can be
eradicated if strategic planning and policies that can combat the
negative effect of fuel subsidy removal are put in place by the
Federal Government, as this will help SMEs thrive and still carry
out their operations without much difficulty.

References
Adagunodo, M. (2022). The effect of oil receipts and fuel subsidy
payments on the current account deficit in Nigeria and
Venezuela. Annals of Spiru Haret University. Economic Series,
22(1), 137-152. https://doi.org/10.26458/2238
Adeniran, A. O. (2016). Effects of fuel subsidy on transport costs and
transport rates in Nigeria. Journal of Energy Technologies and
Policy, 6(11), 1-9.
Adeoti, A., Taiwo, O., & Fatoki, O. (2016). Compensation
mechanisms for fuel subsidy removal in Nigeria. International
Institute for Sustainable Development.
https://doi.org/10.3319/IISD.RG.2016
Akinyemi, O., Alege, P. O., Ajayi, O. O., & Okodua, H. (2017).
Energy pricing policy and environmental quality in Nigeria: A
dynamic computable general equilibrium approach.
International Journal of Energy Economics and Policy, 7(1),
268-276.
Ali, M. (2003). Issues in the Nigerian economy. AMP Express
Publishers Limited.
Apeloko, D. O., & Olajide, O. J. (2012). Newspaper coverage of oil
subsidy removal remonstration: A thoughtful analysis of the
2012 experience in Nigeria. In Environmental conflicts and
peacebuilding in Africa (pp. 125-130). Adejo Publishing.
Asenge, E., Diaka, H., & Soom, A. (2018). Entrepreneurial mindset
and performance of small and medium scale enterprises in
Makurdi Metropolis, Benue State, Nigeria. International
Journal of Innovation, 6(2), 124-146.
43
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

Edet, A. (2023). The impact of fuel subsidy removal on small and

medium enterprises in Nigeria. Quick Ride Technologies Nig.
Ltd.
Evans, O., Nwaogwugwu, I., Vincent, O., Wale-Awe, O., Mesagan,
E., & Ojapinwa, T. (2023). The socioeconomics of the 2023 fuel
subsidy removal in Nigeria. BizEcons Quarterly, 17, 12-32.
https://doi.org/10.31034/17.BEZQ023
Fatai, A. (2011). Small and medium scale enterprises in Nigeria: The
problems & prospects. Retrieved from
https://www.thecje.com/journal/index.php/economicsjournal/ar
ticle/.../8.
Fathurrahman, F., Kat, B., & Soytaṣ, U. (2017). Simulating
Indonesian fuel subsidy reform: A social accounting matrix
analysis. Annals of Operations Research, 255, 591-615.
https://doi.org/10.1007/s10479-017-2604-9
Houeland, C. (2020). Contentious and institutional politics in a petro-
state: Nigeria's 2012 fuel subsidy protests. The Extractive
Industries and Society, 7(4), 1230-1237.
https://doi.org/10.1016/j.exis.2020.06.002
Ilodigwe, A. O. (2023). Fuel subsidy removal and its negative impact
on small and medium scale enterprises. Journal of Education,
Humanities, Management & Social Sciences (JEHMSS), 25-35.
International Finance Corporation (IFC). (2021). Small and medium
enterprises (SMEs). Retrieved from
https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_e
xternal_corporate_site/SME+Development/
International Monetary Fund (IMF). (2019). Nigeria: Selected issues,
fuel subsidies – Latest increase and implications of a change in
the regulated gasoline price. IMF Country Report (Vol. 2019,
Issue 093).
https://www.imf.org/external/pubs/ft/scr/2019/cr19393.pdf
Iroanusi, Q. (2021). Despite PIA, proposed deregulation, Nigerian
govt to spend N900m for subsidy in 2022. Premium Times.
Retrieved from
https://www.premiumtimesng.com/news/headlines/482751-

44
Impact
POLICYofAND
Fuel Subsidy Removal on
DEVELOPMENT Small IN
ISSUES andNIGERIA
Medium Scale … S. O. Ozuma

despite-pia-proposed-deregulation-nigerian-govt-to-spend-
n900m-for-subsidy-in-2022.html?tztc=1
Jamil, C. M., & Rapiah, M. (2011). Performance measurement system
(PMS) in small medium enterprises (SMEs): A practical
modified framework. World Journal of Social Science, 1(1),
200-212.
Kadiri, I. B. (2012). Small and medium scale enterprises and
employment generation in Nigeria: The role of finance. Arab
Journal of Business and Management Review, 1(1), 79-93.
Kolawole, Y. (2023). Fuel subsidy: Small businesses suffer losses.
Vanguard Newspaper. ASBON.
Lawal, W. A., & Ijaiya, M. A. (2007). Small and medium scale
enterprises access to commercial banks credits and their
contributions to GDP in Nigeria. Asian Economic Review
Journal of Indian Institute of Economics, 49, 360-368.
Majekodunmi, A. (2013). The political economy of fuel subsidy
removal in Nigeria. International Journal of Management and
Social Sciences Research, 2(7), 76-81.
Mohammed, A. B., Ahmed, F. F., & Adedeji, A. N. (2020).
Assessment of impact of fuel subsidy removal on socioeconomic
characteristics: A survey of households in Maiduguri, Borno
State, Nigeria. Journal of Business and Economic Development,
5(1), 10-20.
Nigerian Economic Summit (NES) Group. (2023). Research
document: Understanding fuel subsidy removal and its
economic and social impact. Retrieved from
https://nesgroup.org/researchdocument/understanding-fuel-
subsidy-removal-and-its-economic-and-social-impact
Omotola, D. (2008). Small scale enterprises, economic reform and
national development in Nigeria. Adejo Publishing.
Onyishi, A. O., Eme, O., & Emeh, I. E. (2012). The domestic and
international implications of fuel subsidy removal crisis in
Nigeria. Kuwait Chapter of Arabian Journal of Business and
Management Review, 1(6), 57-80.

45
POLICY AND DEVELOPMENT ISSUES IN NIGERIA

Ozili, P. K. (2023). Implications of fuel subsidy removal on the

Nigerian economy. In K. Obiora (Ed.), Public policy’s role in
achieving sustainable development goals (pp. 155-178). IGI
Global. MPRA Paper No. 120509. https://mpra.ub.uni-
muenchen.de/120509/
PwC. (2023). Fuel subsidy in Nigeria: Issues, challenges and the way
forward. PwC Network.
Raji, A. (2018). Fuel subsidy removal and the lives of rural dwellers
in Nigeria (Doctoral dissertation). Department of Sociology,
Faculty of Social Sciences, University of Ilorin, Ilorin, Nigeria.
Shagali, A. A., & Yusuf, R. (2022). Political economy of fuel subsidy
removal in Nigeria: Issues, challenges and the way forward.
Zamfara Journal of Politics and Development, 3(3), 12-25.
Uchenna, A. (2023). Challenges and solutions facing SMEs in Nigeria
today: A comprehensive guide. Retrieved from
https://simplebks.com/blog/challenges-and-solutions-facing-
smes-in-nigeria-today-a-comprehensive-guide/
Ude, C. (2023). June, the foolish man's refinery, fuel subsidy and
everything in-between. June the Foolish Man's Refinery, Fuel
Subsidy and Everything In-Between.
https://doi.org/10.2139/ssrn.4167819
Van Valkengoed, A. M., & Van der Werff, E. (2022). Are subsidies
for climate action effective? Two case studies in the
Netherlands. Environmental Science & Policy, 127, 137-145.
https://doi.org/10.1016/j.envsci.2021.10.005

46