Fuel Subsidies - Gone at Long Last?

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Friday November 26, 2021 / 11:25 AM / by FDC Ltd / Header Image Credit: Guardian Nigeria

 

The federal government, has set for itself a deadline of June 2022 to phase out fuel subsidies. It is even likely to be done earlier in the year as the government appears keen to double down on reforms ahead of the elections in 2023. The government it seems is also prioritizing the welfare of the common Nigerian as it intends to cushion the inflationary impact on the most vulnerable nigerians (40 million) with a monthly N5,000 stipend. The palliative will be remitted through their NINs, BVNs, and account numbers. The move to eliminate subsidies is in congruence with the provisions of the Petroleum Industry Act which was signed into law earlier this year.

 

Fuel subsidy removal- The devil with a good heart

The NNPC spent about N864.07bn on petrol subsidy in 9M'2021 - 31% of its revenue (N2.7trn) in the same period - thereby lowering its remittances to the federation. The federal government's decision to phase down fuel subsidies by 2022 elicits both relief and worry. The GMD of the state oil company, NNPC has stated that the removal of subsidies will push the pump price of petrol to between N320/ltr and N340/ltr. This would lead to higher logistics costs and further stoke inflationary pressures.

 

Impact on the Government

We expect subsidy removal to increase government revenue and narrow the fiscal deficit. It is however important that the freed up funds are channeled to critical infrastructure projects sectors of the economy that have direct impact on the common Nigerian (transport, education and health system). However, deregulated petrol pricing could require the government to take on powerful trade unions and civil society groups who have in the past responded to major hikes in petrol prices with strikes and protests.

 

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Impact on Business

Many businesses will be confronted with higher logistics and operational costs which may be absorbed or passed on to consumers in the form of higher prices. This could be negative for profitability as the embattled Nigerian consumer is likely to re-prioritize his expenses in order of affordability.

 

Impact on the consumer

The Nigerian consumer will bear the brunt of the removal of subsidy as higher pump prices for fuel will further eat into his already eroded dispodable income. The N5,000 palliative is expected to cushion the impact of subsidy removal on the poorest consumers. It is noteworthy that the short time allotted to the implementation of this scheme implies that they will be confronted with the full impact of the petrol price increase when the period comes to an end.


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Impact on the Petroleum Industry

While being a disincentive for smuggling, the removal of subsidies is a pre-requisite to the full deregulation of the downstream petroleum sector which is positive for investment and job creation. The good news is that Dangote refinery, with a production capacity of 650,000bpd, will commence operations in 2022. This, coupled with the revamping of Nigeria's three major refineries, (Kaduna, Port Harcourt and Warri) is expected to meet all Nigeria's refined crude demand, with room for exports. This is positive for oil export earnings, the trade balance, external reserves accretion, and will end Nigeria's dependence on the importation of refined petroleum products. Additionally, it could propel Nigeria to refining hub status.


 Proshare Nigeria Pvt. Ltd.


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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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