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THE IMPACT OF FUEL SUBSIDY REMOVAL ON THE OPERATIONS OF SMALL SCALE BUSINESS IN KOGI STATE (A CASE STUDY OF SELECTED WATER PROCESSING FACTORY IN ANYIGBA)

 Format: MS-Word   Chapters: 1-5

 Pages: 95   Attributes: Primary Data/questionnaire, Data Analysis

 Amount: 3,000

 Aug 28, 2018 |  08:45 am |  1907

ABSTRACT


The study examined the impact of fuel subsidy removal on the operations of small scale businesses in Anyigba, Kogi State, using five purposively selected pure water processing factories in the town. The broad objective was to ascertain the relationship between the fuel subsidy removal and the operations and performance of the selected water factories in the study area. The study employed primary data sourced through well-structured questionnaires as the data collection procedure and technique. The questionnaires were administered to 168 personnel of the factories. Descriptive statistical technique tools such as frequency table and cumulative percentages were used to present and analyze the data, while the Chi-Square technique was employed to test for the hypothesis. The result revealed that the fuel subsidy removal has significant impacts on the operations and performance of the water factories, and based on these findings, it is concluded that fuel subsidy removal policy of the government has a significantly negative impact on small scale businesses in Anyigba, Kogi State. The study thus recommended among others, that the Federal Government should ensure that the Subsidy Reinvestment Programme (SURE- P) meet the targeted small scale business owners. By this, a special monitoring committee should be set up and mandated to follow up and evaluate the performance of the program

CHAPTER ONE

INTRODUCTION

1.1     Background to the study

By definition, subsidy means a grant by the government to assist an individual or private commercial enterprise deemed beneficial to the public. It is also a grant or gift of money from a government to a private company, organization, or charity to help it function. Subsidy, in economic sense, exists when consumers of a given commodity are assisted by the government to pay less than the prevailing market price. In relation to fuel in Nigeria, it means the financial aid granted to autonomous and foremost oil marketers by the government for them to supply their products at a cheaper rate for the good of the masses (Chukwulobe, 2014).

Alternatively, fuel subsidy could be described as the difference between the actual market price of petroleum products per litre and what the final consumers pay for those same products. The underlying working of fuel subsidy is that consumers would pay less than the pump price per litre of products.  Arrow (1985) cited in Idris (2014) opined that in economic theory, under certain circumstances, the allocation of resources by market forces is optimal. But this differs in practice, in the real world, market forces does not allocate resources efficiently. Hence, government intervenes by granting subsidies and other incentives to restore resource allocation to the efficient or optimal level. This has been the allocation rationale of subsidy on Premium Motor Spirit (PMS or fuel) in Nigeria (Idris, 2014).

Subsidy of petroleum product as an economic policy evolved as a means to cushion the effect importation of petroleum products has on the cost of the commodity and its attendant hardship on the average citizens. What it basically entails is that for every liter of fuel imported into the country, the government pays a percentage off the top in order for it to be sold below the cost of importation.

Indeed, developing countries, Nigeria inclusive; have used fuel subsidies for consumers primarily as a means of achieving certain social, economic, and environmental objectives, as identified by Bazilian and Onyeji, (2012). These include alleviating energy poverty and improving equity, increasing domestic supply, national wealth redistribution, correction of externalities and controlling inflation (Chukwulobe, 2014), while the small scale businesses are not left out of these benefits, in fact, Oyedele (2012) identified Small Scale businesses in Nigeria as the most beneficiaries of fuel subsidy. This can thus partly explained the relative growth of the subsector in the country over the years. According to the 2012 Enterprise Baseline Survey presented in Abuja, the small scale enterprises or businesses contribute nearly half of the Nigerian GDP and accounts for over 25% of employment in the country (Vanguard, 2012).

However, on the surface, the idea of fuel subsidy seems to be a good one as it makes fuel products available at cheaper rates to all, but successive governments over the years have argued that not only is it inherently unsustainable , it is also highly detrimental to the economic growth of the nation. Considering that the population of the country is increasing daily, and the demand for petroleum products increases also, the government would have to budget astronomical amounts of money yearly to maintain fuel subsidy. This means that larger percentage of cash would be used for fuel subsidy than for capital expenditures. This fact was evidenced when it was said that between 2006 and 2013, Nigeria had spent over N5.42 trillion subsidizing petrol, this however does not include the huge amount expended on kerosene subsidy (Vanguard, 2014). To be specific, the amount  spent on petro subsidy alone in eight years is 15.57% higher than the N4.69 trillion 2014 National Budget, and also 10.61% more than the 2013 budget of N4.93 trillion. In 2014, a total of N971.1 billion was expended on payments of subsidy (NBS, 2016).

The amount the country had spent on subsidy was almost twice the amount 196.07% allocated for education in the 2014 budget, which is N495.28 billion; more than three times (369.6%) the N262.74 billion budgeted for health; and 148% more than the N655.47 billion allocated for the Universal Basic Education Commission (UBEC) and the Tertiary Education Trust Fund (TETFUND) (NBS, 2015); (Vanguard, 2014).

Also, there were cases of large scale corruption in the oil industry that created artificial scarcity thus making the impact of fuel subsidy not to be felt.

The forgoing fact led to the increasing call for the abolishing of subsidy on petroleum products in the country. The Goodluck’s administration, in an attempt to curb these abnormalities in the oil industry announced the removal of fuel subsidy on the 1st of January 2012; this saw the PMS Price rising from N65 to about N141 per liter. This development generated a whole lot of heated arguments and controversies, hence the government had to relax the policy into some sort of partial removal; and then, the fuel Price was reduced from the N141/liter to N97/liter.

However, Due to decline in government income related to falls in crude oil price and limited crude oil output caused by the spate of renewed vandalism and sabotage of oil infrastructure in the Niger Delta, the revenues accruing to the government fell drastically, thus sustaining the fuel subsidy policy becomes fiscally impossible for the government. This plausible reason led to the recent decision of the present government to announce an outright removal of subsidy on fuel. This outright removal has brought an increase in price of fuel from 97/liter to 145/liter, representing over 50% increase.

With this increase, the prices of goods and services have skyrocketed. Relative poverty in Nigeria is currently at over 80% in some states and an average of 8 out 10 homes in Nigeria are squeezed with the struggle to feed the children and pay for their school fees (This Day, 2016). Unemployment is about 40% in Nigeria which means the level of empowerment of the citizenry is very weak as to afford such astronomical increase in the prices of goods and services occasioned by the removal of the fuel subsidy. The high level of unemployment also shows that the real sector of the economy is pretty much down and cannot shoulder the huge financial burden that the removal of fuel subsidy will result to. Small and medium scale enterprises (SMEs) that use power in their businesses are already squeezed because they cannot operate at reasonable capacity. Most of them have closed shop because of the high cost of fuel which they have to use to run their machines as PHCN no longer live to its expectations. No doubt the removal of subsidy on fuel at this time has had adverse effect on the socio-economic stance of the country, it is thus imperative to examine the effect of the removal on the operation of small scale businesses in Nigeria.

1.2     Statement of Research Problem

Whenever the price of fuel goes up the prices of everything goes up. This is because transport cost for providing essential services, the prices of goods and services all have multiplier effect on the economy. To this end, the removal of fuel subsidy has paralyzed social and economic activities in the country, particularly in Kogi State, and as a result, there has been noticeable hike in prices of commodities and products in markets. A market survey carried out recently in various parts of Kogi State such as Itobe market and Anyigba market showed that the high prices were occasioned by the removal of fuel subsidy (Ocheni, 2016). Building material markets at Lokoja and Okene have recorded a tremendous price increase of late. A glance at the prices show that building materials like the complete white bath tub which used to be N9,375.00 in August 2011 now goes for N16,500.00 a bundle of zinc now cost N15,200.00 compared to N8,000 in August 2011. Also a glance at the food stuff market recorded considerable increase as a bag of rice that used to be sold for N7,000 in 2011now sells for N18, 000 to N19,000, while Beans (brown) is now N9, 550 against N4, 500.00 in August 2011.Some of the market people spoken to attributed the increase to the removal of fuel subsidy which led to increase in fuel pump prices (This Day, 2016).

They complained that the cost of transporting the materials and commodities from the point of purchase to the place of the business has increased; consequently patronage has dwindled as a result of ever increasing prices. Transporters on their part complained that getting their tanks filled in the face of hike in fuel price is very difficult. The problem also affects small scale businesses in the town drastically, such as; Hotels, Barbers, Welders, Hair Dressers, Pepper Sellers, Private Clinic, Bakery, and Water Processing Factory, etc. that all rely on subsidized fuel, as most of these businesses operate solely on power from generators, which are fired by petrol; this has thus resulted into high cost of production for the businesses, while a good number of them cannot operate at reasonable capacity, some have folded up because of the high cost of fuel which they have to use to run their machines and day-to-day operations.

Summarily put therefore, the subsidy removal has cause untold hardship on the economic lives of the citizens in the following ways: increased cost of living, increased in transportation, operational costs of firms doing business in the country, leading to reduction in productive capacity; general unemployment – as many as who cannot cope with increase production cost are forced to lay off workers.

It is in the light of the above that this study will be investigating the impact of the above enumerated problems as a result of fuel subsidy removal on operations of small scale businesses in Anyigba.

1.3     Research Questions

The position of this study will be established upon some relatable questions; as follows:

a)     What is the impact of fuel subsidy removal on the operations of small scale businesses in Anyigba?

b)    What is the contribution of fuel subsidy removal to the performance of small scale businesses in Anyigba?

c)     What ways can the fuel subsidy removal policy be managed to improve the operations of small scale businesses in Anyigba?

1.4     Objectives of the Study

The broad objective of the study is to investigate the impact of fuel subsidy removal on the operations of small scale businesses in Kogi State. However, the specific objectives are stated as follows:

a)     To examine the impact of fuel subsidy removal on the operations of small scale businesses in Anyigba.

b)    To determine the contribution of fuel subsidy removal to the performance of small scale businesses in Anyigba.

c)     To make recommendations on how the fuel subsidy removal policy can be managed to improve the operations of small scale businesses in Anyigba.

1.5     Research Hypothesis

The hypotheses that would be tested in the course of this study are stated as follows:

Hypothesis 1

(Ho): Fuel subsidy removal has no significant impact on operations of small scale enterprises in Anyigba, Kogi State.

(H1): Fuel subsidy removal has significant impact on operations of small scale enterprises in Anyigba, Kogi State.

Hypothesis 2

(Ho): Fuel subsidy removal has no significant impact on performance of small scale enterprises in Anyigba, Kogi State.

(H1): Fuel subsidy removal has significant impact on performance of small scale enterprises in Anyigba, Kogi State.

1.6     Significance of the Study

The untold hardship on the economic lives of the citizens, such as; increased and increasing transportation costs, increasing operational costs of small scale businesses, leading to reduction in productive capacity among others as a result of the decision of the federal government to outrightly removed subsidy on fuel or Premium Motor Spirit (PMS) necessitated this study at this time. The rationale behind this study at this time is consequently to explore an empirical analysis into the impact of fuel subsidy removal on the operations of small scale businesses in Anyigba, Kogi State.

It is thus assumed that at the completion of this research work, it will be essential to policy makers, as the findings herein will provide policy recommendations on how the fuel subsidy removal policy can be managed to bring about improvement in the operations and profitability of small scale businesses in Anyigba. Furthermore, it would contribute to the existing literatures on the subject matter and also be an invaluable tool to researchers and students who want to delve into the subject matter.

1.7     Scope and Limitations of the Study

The Nigerian economy is made up of diverse components and complex structures, thus it will be practically time consuming and rarely feasible to consider all of these factors in a study like this. Hence, the study will only be confined to evaluating the impact of fuel subsidy removal on operations of small scale businesses in Anyigba, using a case of a five selected water processing factory in Anyigba metropolis. The study is equally meant to cover only the removal of petro subsidy, that is, the Premium Motor Spirit (PMS or fuel), and not any other form of petroleum products. And the basic constraint of the study is the scantiness of recent empirical literatures and reliable up-to-date data on fuel subsidy policies.

However, adequate effort has been put to ensure that none of these constraints/limitations affect the validation of the findings therein.

1.8     Organization of the Study

The study is divided into five (5) chapters and organized as follows:

Chapter one forms the introductory part; it comprises of the background of the study, statement of problem, research questions and objectives, hypothesis, justification and limitations of the study, as well as the structure of the study. Chapter two is the literature review which shows the conceptual issues, theoretical and empirical reviews of related literatures. Chapter three is the research methodology. This chapter entails the approach to be adopted, data collection which is mainly primary data, and the evaluation techniques to apply for data analysis. Furthermore, the findings and results will be presented and discussed in chapter four, while the concluding chapter is the chapter five, which reflects on the summary, conclusion, and recommendations.

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