Will Nigeria remove fuel subsidies in 2022?

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One of the major themes dominating global markets is the recent surge in oil prices. Brent and WTI crude have appreciated to multiyear highs this month thanks to the combination of tightening supplies and rising demand.

The explosive appreciation in oil is bad news for energy consumers but a welcome development for energy-producing countries like Nigeria which acquires over 90% of export earnings and roughly 70% of government earnings from oil sales.

It does not end here; the fuel subsidies shield consumers from higher international oil prices. Meaning, that the government fixes the price of gasoline for consumers below the international prices and uses its own funds to pay for the difference.

On the surface, higher oil prices look like a win:win scenario for Nigeria as it provides the government more money to fulfil its financial obligations while domestic consumers are protected via subsidies.

However, digging deeper the dynamics are much complicated. One thing to keep in mind is that Nigeria exports crude by imports all by-products of the resource, including the most premium motor spirit. With Africa’s largest economy consuming more than its refineries can produce, it depends heavily on importation for its energy needs which has recently jumped to over 70 million litres per day.

Ironically, rising international oil prices will put more pressure on the country’s foreign exchange while the revenues from oil sales may be drained by the fuel subsidies. According to data from the Nigerian National Petroleum Corporation (NNPC), the cost of petrol subsidies may hit N1 trillion by December if oil prices continue to rally.

This will impact the government’s ability to fulfil its financial obligations and may even impact the recently approved 2022 budget.

According to the Minister of Finance, Budget, and National Planning, Dr. Zainab Ahmed, plans are underway by the government to remove subsidies on petrol in 2022. On paper, this could reduce an incredible amount of pressure on the government, leaving them with more cash to support the economy. However, the question is whether Nigeria is strong enough to shoulder the negative consequences from the removal of oil subsidies.

Outside of Nigeria, higher petrol prices have fueled fears over rising inflation which could hit disposable income and impact economic growth. The horrible combination of rising inflation and slowing growth continues to fan concerns over stagflation. Removing fuel subsidies is likely to expose Nigeria to such risks.

Another question is the socioeconomic consequences of such a move.  If Nigeria had a chance to remove the subsidies, this could have been when oil prices trading at record lows last year. Fast forward today, oil bulls are on a tear with the fundamentals propelling prices towards $100 – a level not seen since 2014. To remove the subsidies now, may result in spiralling inflation but keeping them active continues to drain the government coffers.

On the bright side, Nigeria remains on an ongoing quest to diversify away from the chains of oil reliance while the Dangote refinery is seen being a major game-changer. It will be Africa’s largest oil refinery with an incredible capacity of 650,000 barrels per day, significantly reducing fuel imports, supplying the west African region with refined products. With its completion around the corner, there is still some light at the end of the tunnel for Nigeria.

Written on 07/10/2021 13:00 GMT by Lukman Otunuga, Senior Research Analyst at FXTM

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