EFFECT OF FUEL SUBSIDY REMOVAL ON PERFORMANCE OF SMALL SCALE ENTERPRISES: A CASE STUDY OF MAIDUGURI METROPOLITAN, BORNO STATE

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

A subsidy refers to the financial assistance provided by the government to sectors, institutions, or individuals in order to achieve economic and social goals (Wenqi et al., 2022). Regarding fuel subsidies, governments interfere by establishing prices that are lower than the rates in the worldwide market. This action helps to relieve the financial strain on consumers (Xiang et al., 2021). The justification for subsidies frequently stems from the aim to bolster vital industries, promote economic growth, and enhance the quality of life for inhabitants (Bao et al., 2020). Fuel subsidies are a policy tool that governments use to provide affordable energy, promote economic growth, and protect citizens from changes in global oil prices (Skovgaard & van Asselt, 2019). These subsidies, which artificially reduce the price of fuels such as petrol and diesel, have had a significant impact on the economic conditions, especially in developing countries (Solarin, 2020).  Nevertheless, the outcomes of these subsidies are intricate, carrying substantial ramifications for many sectors, including the fundamental support of numerous economies—small-scale companies.

Prior research has mostly emphasized the effects of fuel subsidies on climate change. Skovgaard and van Asselt (2019) argued that although reforming fossil fuel subsidies has the potential to mitigate climate change, the intricate international and domestic political circumstances make this process more difficult, presenting challenges that may not be in line with conventional climate politics. Monasterolo and Raberto (2019) argue that there is a growing agreement that the fossil fuel subsidies given by wealthy governments are in conflict with the emission reduction objectives of the global climate agenda. This has led to discussions about the adverse social, economic, and environmental effects of these subsidies. In addition to previous research examining the effects of fuel subsidies on developed countries (Chepeliev & van der Mensbrugghe, 2020; Erickson et al., 2020; Heger et al., 2019; Bassi et al., 2023).  In their study, Solarin (2020) examined the key elements that contribute to environmental degradation, with a specific emphasis on the subsidies provided to fossil fuels in 35 developing and emerging nations. The study found that a 10% increase in subsidies for fossil fuels results in an increase in the ecological footprint ranging from 0.3% to 1.5%. This demonstrates the influence of factors such as population size, real GDP per capita, urbanisation, and the non-dependent population on environmental degradation.

In Nigeria, a country with a developing economy that heavily depends on its oil and gas sector, fuel subsidies have been deeply embedded in economic policies since the establishment of the Nigerian National Petroleum Corporation (NNPC) in 1977 (Agbonifo, 2023; McCulloch et al., 2021). The subsidy regime, which was established in the 1970s to alleviate the effects of increasing world oil prices, has now become a substantial element of the country's economic framework (Solarin, 2020). Over time, the practice of subsidising fuel has resulted in significant expenses, with estimates indicating that billions of dollars have been spent on fuel subsidy payments in the past few decades (Houeland, 2020).  Although fuel subsidies were initially designed to provide benefits, their elimination has now become a subject of debate and policy implementation. President Bola Ahmed Tinubu made a huge change in the economic environment by announcing the complete elimination of gasoline subsidies in May 2023. This move has caused a sequence of occurrences, mostly leading to a rise in gasoline prices, which in turn has impacted the functioning of businesses, especially small-scale industries—the driving force behind economic growth in Nigeria.

Prior research has examined the impacts of discontinuing fuel subsidies in Nigeria at different points in time on several socio-economic domains.  Houeland (2020) examined the relationship between popular protests and the institutional politics surrounding the withdrawal of gasoline subsidies. The study presents four interrelated assertions regarding the impact of protests on institutional politics. It highlights the historical significance of labor-led subsidy protests, examines the contextual factors that intensified the 2012 protests, analyses the influence of new actors on the fragmentation of the movement, and explores the enduring influence of civic agency on state-citizen relations, particularly in the realm of party politics and elections. Agbonifo (2023) utilised Gaventa's 'power cube' as an analytical framework to examine the interactions between the government and protesters. This approach considers power relations as a multifaceted interplay of dominance and resistance, providing a new viewpoint on the discussion surrounding the relationship between protests and empowerment, which is often hindered by oversimplified arguments. 

Conversely, Ozili and Obiora (2023) analysed the consequences of the elimination of fuel subsidies in Nigeria in 2023. The study illuminated the macroeconomic and microeconomic ramifications through the utilisation of discourse analysis approach.  The removal is expected to have beneficial outcomes, including the release of financial resources for other sectors, the increase in domestic refinery production, the reduction of reliance on imported fuel, the improvement of employment rates, the allocation of funds towards critical infrastructure development, the decrease in the budget deficit, the generation of a budget surplus, the reduction of corruption associated with fuel subsidies, the promotion of competition, the revitalisation of domestic refineries, and the alleviation of pressure on the exchange rate.

Small-scale enterprises have a crucial role in Nigeria's economic progress and advancement, as demonstrated by their substantial impact in terms of generating employment, alleviating poverty, boosting GDP, and reducing crime rates (Anwanakak, 2023). Throughout the years, the federal government has provided financial support for the importation of petrol fuel in order to alleviate economic pressure on Nigerians, particularly those who are more susceptible to hardship. Nevertheless, extensive corruption in the oil industry's lower stages, along with increasing debt from subsidies, forced the government to partially eliminate subsidies. This decision was made due to the significant strain it was placing on public finances and budgets (Anwanakak, 2023). The implementation of the new non-subsidy policy has adverse effects, especially on small and vulnerable businesses that heavily depend on generator power fuelled by petrol due to Nigeria's persistent power shortages. The escalating expenses of fuel, coupled with the unreliability of electricity, are significantly impacting small enterprises that are already grappling with survival challenges (Hamiza, 2023). According to Hamiza (2023), there are several documented effects that can be observed. These include increased production expenses, rising overhead costs, reduced customer patronage due to pricing pressures, inflationary pressures on the whole economy, and long-term concerns to business survival. To effectively mitigate the disruptions caused by the elimination of subsidies on essential small firms, it is crucial to carefully analyse policies due to their significant impact on national development, particularly in terms of job creation. 

Maiduguri, the administrative centre of Borno State, serves as a prominent economic centre in the northeastern region of Nigeria. The city possesses a dynamic and thriving system of small businesses that make a significant contribution to the local economy and employment rates (Mangvwat, 2023). The elimination of gasoline subsidies introduces additional intricacy to the operational landscape for small and medium-sized enterprises (SSEs) in Maiduguri (Henry, 2024). The change in policy, albeit financially wise, has resulted in higher fuel costs, impacting both consumers and companies in the Maiduguri metropolis. This study aims to evaluate the impact of removing fuel subsidies on the performance of small-scale enterprises in Maiduguri Metropolitan, Borno State.

1.2 Statement of the problem

The elimination of fuel subsidies in Nigeria is a notable change in economic policy with the goal of tackling budgetary imbalances and encouraging the effective distribution of resources. This policy aims to decrease government spending and promote market-driven fuel pricing. However, it has significant ramifications for several sectors of the economy, especially small-scale enterprises (SSEs). The elimination of fuel subsidies has a particularly noticeable effect on Small and Medium-Sized Enterprises (SSEs) in Maiduguri Metropolitan, Borno State. This is because the economic environment in the area is already weak due to security challenges and a lack of infrastructure.

Small and medium-sized enterprises (SMEs), which are crucial for the functioning and development of any economy, require a reliable and uninterrupted supply of electricity to conduct their operations and foster expansion. Electricity not only provides energy for machines, but also significantly improves the productivity of human workers in small and medium-sized enterprises (SSEs). According to Ado and Josiah (2019), the lack of dependable electricity negatively impacts the productivity and potential output of the workforce. Since small and medium-sized enterprises (SMEs) are the primary source of job creation, unreliable energy supply poses a significant risk to the sustainable generation of employment opportunities. Almost every task performed by SSEs, especially in the manufacturing sector, depends on a consistent and uninterrupted energy source. Power plays a crucial role in enhancing SSE's marketing endeavours by engaging in value-adding operations like inventory storage. The progress of Nigeria's economic industrialisation has been greatly impeded by the inconsistent and inadequate provision of power (Olugbenga, Jumah & Phillips, 2013). The main cause of this problem is the insufficient infrastructure for power generation, transmission, and distribution, despite significant investments made to improve these systems. Nigerians persistently encounter erratic electricity supply marked by substantial voltage variations, frequent power failures, and interruptions, compelling a significant dependence on privately generated electricity from generators (Iwayemi, 2018). 

Furthermore, the withdrawal of fuel subsidies has exacerbated the situation even further (Udah, 2023). When SSEs experience increased operational costs, they frequently transfer these costs to consumers by raising prices for goods and services (Tola, 2022). Price inflation can result in decreased demand as consumers may lower their spending or choose for more affordable alternatives. As a result, small businesses may face a decrease in both sales volumes and revenues, which adds additional pressure to their financial stability (Darego et al, 2023). Smaller businesses generally possess limited resources and face more difficulty in obtaining finance compared to larger corporations. Higher gasoline prices can have a disproportionate impact on small and medium-sized enterprises (SSEs), resulting in increased operational expenses and reduced competitiveness. Big corporations may have superior resources to handle the rising costs or invest in more effective technologies, putting small and medium-sized enterprises (SSEs) at a disadvantage (Ossom, 2023). The objective of this study is to assess the effects of eliminating gasoline subsidies on the operational effectiveness of small-scale businesses in Maiduguri Metropolitan, Borno State.

Objectives of the study

The primary objective of this study is to critically assess the effect of fuel subsidy removal on performance of small scale enterprises: a case study of Maiduguri metropolitan, Borno state. Specific objectives of this study are to:

To assess the effect of Fuel Subsidy Removal on sales volume of SMEs in Maiduguri metropolitan, Borno state

To assess the effect of Fuel Subsidy Removal on profitability of SMEs in Maiduguri metropolitan, Borno state

To assess the effect of Fuel Subsidy Removal on inventory turnover of SMEs in Maiduguri metropolitan, Borno state

To assess the effect of Fuel Subsidy Removal on market share of SMEs in Maiduguri metropolitan, Borno state

1.4 Research Questions

The following research questions which are in line with the objectives of this study will be answered in this study:

What is the effect of Fuel Subsidy Removal on sales volume of SMEs in Maiduguri metropolitan, Borno state?

What is the effect of Fuel Subsidy Removal on profitability of SMEs in Maiduguri metropolitan, Borno state?

What is the effect of Fuel Subsidy Removal on inventory turnover of SMEs in Maiduguri metropolitan, Borno state?

What is the effect of Fuel Subsidy Removal on market share of SMEs in Maiduguri metropolitan, Borno state?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

Ho: There are no significant effect of Fuel Subsidy Removal on sales volume of SMEs in Maiduguri metropolitan, Borno state.

Ha: There are significant effect of Fuel Subsidy Removal on sales volume of SMEs in Maiduguri metropolitan, Borno state.

1.6 Significance of the study

An investigation on the impact of eliminating fuel subsidies on small businesses in Maiduguri Metropolitan, Borno State, is crucial for comprehending its economic, social, and policy consequences at the community level. Practically, the study will enhance the ability to make well-informed decisions, promotes economic resilience, and encourages sustainable development in the region. The study will hold great importance for small-scale entrepreneurs in Maiduguri and Nigeria as a whole, as well as for policymakers, students, and scholars. Mre so, analysing this impact can yield evidence regarding the influence of fluctuations in fuel expenses on their profitability, sustainability, and competitive capabilities. 

This study aims to elucidate the adaptations that organisations do in reaction to rising operational expenses, including modifications in pricing tactics, production techniques, and supply chain administration. An in-depth comprehension of the impact of fuel subsidy removal on their growth and sustainability is crucial for engaging in wider conversations about promoting economic resilience and inclusive growth in the region.

Moreover, conducting research on the consequences of eliminating fuel subsidies for small-scale firms contributes to the existing knowledge in the fields of economics, company management, and policy studies. This resource offers pragmatic knowledge for entrepreneurs, policymakers, and development practitioners who aim to assist small enterprises in adjusting to economic reforms and external disruptions.

1.7 Scope of the study

Broadly, this study focus is to critically assess the effect of fuel subsidy removal on performance of small scale enterprises in Nigeria. Specifically, this study seeks to assess the effect of Fuel Subsidy Removal on sales volume of SMEs in Nigeria,and assess the effect of Fuel Subsidy Removal on customer satisfaction of SMEs in Nigeria. Further, this study will focus on assessing the effect of Fuel Subsidy Removal on inventory turnover of SMEs in Nigeria and it also seeks to assess the effect of Fuel Subsidy Removal on market share of SMEs in Maiduguri metropolitan, Borno state. Geographically,  the study is carried out in Maiduguri, Nigeria. 

1.8 Limitations of the study

Like in any human attempt, the researchers encountered several small limits during the investigation. The primary constraint was the dearth of comprehensive literature on the topic, given the scarcity of data pertaining to the effect of fuel subsidy removal on performance of small scale enterprises: a case study of Maiduguri metropolitan, Borno state. Therefore, a substantial investment of time and effort was required to identify the suitable materials, books, or information and to collect data.  Moreover, this study is limited by its diminutive sample size and restricted geographical range, concentrating just on Maiduguri, Nigeria. Hence, the findings of this study cannot be extrapolated, thereby necessitating additional research. Furthermore, the researcher's restraints were predominantly attributable to financial limitations, as they are a student without a means of revenue to support themselves. The research location's high transportation costs, impacted by current inflation in Nigeria, made it difficult to afford transportation fees.

In addition, the researcher encountered a time limitation as a result of the necessity to do this research while simultaneously meeting the responsibilities of attending lectures and engaging in other educational pursuits.

1.9 Definition of terms

Subsidy: A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government or a targeted tax cut. In economic theory, subsidies can be used to offset market failures and externalities to achieve greater economic efficiency.

Fuel subsidy removal: Fuel subsidy removal is the process of ending government financial assistance for fuel, causing prices to rise to market levels. This leads to increased fuel costs and can have economic and social impacts.

Small scale enterprise: A business which functions on a small scale level involves less capital investment, less number of labor and fewer machines to operate is known as a small business. Small scale Industries or small business are the type of industries that produces goods and services on a small scale.