Nigeria is considering ways to cushion the impact of fuel-subsidy cuts as it weighs the possibility that the reform may stoke popular discontent, an adviser to the nation’s president said.
While those policies are being formulated, the state is continuing interventions that it says cost an estimated 744 billion naira ($1.8 billion) a year from 2006 to 2019 to maintain lower gasoline prices. That’s equivalent to about 10% of this year’s projected government revenue.
“There is broad alignment that deregulation is an urgent need,” Ahmad Zakari, special adviser to President Muhammadu Buhari, said in an interview Friday. “There is a clear understanding of the challenges that Nigerians face economically and government will be sensitive to that as we craft any implementation.”
Raising pump prices, let alone allowing them to move in line with international crude markets, is a risky proposition for Nigerian politicians. Many in Africa’s largest economy, which also hosts the highest number of people living in extreme poverty globally, regard cheap fuel as their single dependable benefit from the country’s misspent oil wealth.
Strikes and protests triggered by former President Goodluck Jonathan’s swiftly reversed efforts to abolish subsidies nine years ago contributed to him and his party losing the 2015 election that brought Buhari to power.
Nigerians are already having to contend with the highest inflation rate in four years, the second-highest unemployment rate on a list of 82 countries tracked by Bloomberg, and an economy that’s only just emerged from recession.
As the government works on realizing its plans to deregulate the gasoline industry, it will also ensure there are “adequate measures to cushion the impact,” Zakari said. He didn’t provide further details.
Buhari has been trying since March 2020 to remove the subsidies. Minister of State for Petroleum Resources Timipre Sylva said in September Nigeria expected to save as much as 1 trillion naira ($2.5 billion) a year with the abolition of the support.
Just how skittish the government is about implementing the policy was exhibited earlier this month: Hours after the petroleum regulator announced on March 11 that gasoline prices should be 30% higher, the state-owned Nigerian National Petroleum Corp. pledged there would be no increases this month and Sylva apologized for the regulator’s announcement.
Gasoline prices were allowed to rise several times in the second half of 2020, but the NNPC has kept them steady since early December even though oil is trading about 30% higher. Labor unions have threatened to stage protests if there are any further increases and the government is wary of stoking popular anger after demonstrations last year against a controversial police unit left dozens of people dead.
The government and the unions are in talks to find “a reasonable price regime” by adopting the “least painful” response to crude’s climb, Sylva said March 12.
Despite being Africa’s biggest oil producer, Nigeria purchases all its gasoline from abroad, a service the NNPC has performed exclusively since 2017 via crude-for-fuel swaps with local and international traders. That’s because the country’s four refineries have been shut for rehabilitation for more than two years.
As a result, Nigeria foregoes foreign exchange it could have earned from the sale of about 400,000 barrels of crude per day that it currently exchanges for the refined products it sells cheaply to its citizens.
‘No Longer Sustainable’
The government understands “it can no longer sustain the petroleum subsidy regime,” NNPC Managing Director Mele Kyari said through a spokesman. Deregulation will allow the company to no longer be the sole importer of gasoline and “market forces to determine prices of products thus ensuring availability at all times,” he said.
Nigeria’s reserves have dropped $1 billion this year, heading toward levels last seen in 2017, when the economy was recovering from recession.
The decline, combined with the apparent backsliding on subsidies, has resulted in Nigeria’s dollar bonds not performing as well as they could have this year, according to Samir Gadio, the London-based head of Africa strategy at Standard Chartered Bank.
“Nigeria has outperformed lower-yielding sub-Saharan African credits as oil prices rose, but more significant Eurobond outperformance has been constrained by the fall in foreign-exchange reserves and the fuel subsidy backtrack,” he said.
Nigerian domestic bonds have fallen 17% this year in dollar terms, compared with a 5% loss in the Bloomberg Barclays Global Emerging Market Sovereign Bond index.
— With assistance by Tope Alake, and Rene Vollgraaff
(Updates with analyst comment in penultimate paragraph)