Nigerian officials aim to reduce public reliance on energy subsidies

As the only member of the Organisation of the Petroleum Exporting Countries reliant on imported fuels, Nigeria has long dealt with an expensive trade situation, which has soaked up finite foreign currency reserves and put pressure on the naira. Sector stakeholders have called for the full deregulation of petrol prices, arguing that removing subsidies would trigger investment and discourage wasteful use. However, lower fuel costs remain popular with the general public. Supporters of deregulation include global trade organisations, like the IMF, as well as local trade unions, such as the Nigerian Union of Petroleum and Natural Gas Workers and the Petroleum and Natural Gas Senior Staff Association of Nigeria, which have in the past opposed the concept.

System Challenges

The Nigerian National Petroleum Corporation (NNPC), the state’s energy company, imports the vast majority of fuel, but also signs direct sale-direct purchase (DSDP) agreements with oil companies, in which the NNPC gives the companies crude in exchange for an equivalent value in refined fuels. A system similar to this has at times been prone to corruption, such as in the early 2010s, for example, when agreement holders overcharged the state authorities and failed to execute the terms of the contract. More recently, bureaucratic delays at the NNPC have lead to N650bn ($2.1bn) in payments owed to importers not being sent out, with some businesses claiming job losses and solvency issues as a result. The system is also prone to undersupply in large part due to smuggling. During shortages, it is not only common to witness long lines outside filling stations, but also the promulgation of illegal refining and black market fuels.

The government has resisted calls for a complete deregulation of fuel prices, despite the claims that this could end the country’s fuel supply problems and avoid a long-term fuel price increases. External advisors such as the IMF have noted that subsidies serve to drain state coffers, while disproportionately benefitting wealthy Nigerians and large businesses who consume more fuel, and in some cases, exacerbating the gap between rich and poor. However, with some 150m Nigerians subsisting on less than $2 per day, reduced fuel costs are very popular with the public. Twice in the past 20 years the government has attempted to remove the subsidy altogether, but mass strikes led to smaller subsidy reductions.

Although the belief is that long-term prices would fall as investment in the sector rises, short-term price hikes would be significant. As long as Nigeria is reliant on imports, variables including the price of crude oil and the value of the naira will continue to have a significant impact. To mitigate such effects, importers in the past have been given preferential treatment, with access to the Central Bank of Nigeria’s formal rate of N305:$1. However, basing the exchange rate on the NAFEX, an over-the-counter trading system for currency that allows market-set prices, would see fuel prices jumping by at least 57%, to N228 ($0.74) per litre if Brent Crude oil was trading at $70 per barrel, and to N254 ($0.82) per litre at September 2018 levels of around $80 per barrel, according to economic modelling from PwC. The NAFEX rate was around N365:$1 as of September 2018.

Building Capacity

The state has floated multiple plans to boost domestic refining by building new facilities and fixing its existing ones, which are running at below capacity due to a lack of investment. Dangote Industries’ $10bn refinery project near Lagos is expected to come on-line by 2022 with a capacity of 650,000 barrels per day of petrol and diesel. Upon completion, the plant will be the largest single-train refinery in the world and boost Nigeria’s refining capacity by nearly 150%. Investment in energy infrastructure is likely to be the only viable solution to reducing imports and shielding consumers against costly short-term fuel price hikes.