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Federal Government Makes a U-turn on Subsidy Removal

Oil & Gas	654 VIEWS
Oil & Gas
654 VIEWS

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Tuesday, January 25, 2022 / 11:59 AM / by CSL Research / Header Image Credit: ThisDay/Ecographics

Barely six (6) days after the Senate President, Ahmed Lawan, after a closed-door meeting with President Muhammadu Buhari, said the President did not authorize anyone to remove subsidy, the directive to suspend the removal plan has finally come from the horse's mouth. The government admitted that the timing of the subsidy removal is inopportune, with the risk of heightening the already elevated inflation amidst an extremely stretched consumer wallet.

However, the Minister of Finance, Budget and National Planning, Zainab Ahmed, noted that the 2022 appropriation act only accommodates fuel subsidy for six months (January to June). The Nigerian Petroleum Industry Act (PIA), which was enacted into law in August 2021, provides for the complete deregulation of the downstream sector. We recall that the Minister of State for Petroleum Resources, Timipre Sylva, at an earlier meeting, commented that the signing of the PIB into law showed the removal of petrol subsidy.

Indeed, though we reiterate that the removal of the subsidy is a free-market reform, it appears a continuation of the subsidy regime may be the only option currently, as the removal of the subsidy will jeopardize the gains posted by various sectors, especially as the economic recovery remains fragile. In 2021, crude oil prices continued to rise, implying an increase in the landing cost of PMS. Undoubtedly, another attempt to revise the price to suit current realities will be strongly resisted by the populace who have been hard hit by two recessions and a pandemic in the last 5 years amid rising food and utility costs. Agitations have already begun since the announcement was made. Moreover, we have always believed that the July 2022 commencement date for the plan might not come to fruition, as 2022 is a pre-election year, and the government may be forced to retain the subsidy to avoid any clash with the populace.

While it remains unclear by how much the commencement of active local refining will reduce the landing cost of petrol, the Chairman of Dangote Group, Aliko Dangote, recently disclosed that the refinery would begin operations in Q3 2022, starting with a capacity of 540,000bpd. Nigeria's daily demand for refined crude oil was estimated at 442,000bpd, as of 2018, which still comes below the proposed initial capacity of 540,000bpd. Many other modular refineries are also expected to come on stream. Beyond a possible reduction in the landing cost of petrol, achieving self-sufficiency in refining petrol will help conserve the country's scarce FX.