June 22, 2022

Let’s talk about Nigeria’s fuel subsidies 

 

By Lukman Otunuga, Senior Research Analyst at FXTM

 

Oil benchmarks are up almost 40% since the start of 2022.

Heightened geopolitical risks revolving around the Russia-Ukraine conflict have fuelled supply-side fears.

 

With the United States banning imports of Russian oil and the European Union threatening to make a similar move, the fundamentals favour more upside.

 

However, last week’s announcement by President Biden to release a mammoth 180 million from the country’s strategic petroleum reserves (SPR) between May and October could help oil bears. The idea of the SPR plugging the gaping hole in the absence of Russian oil may limit upside gains in the global commodity. Nevertheless, oil prices remain at multi-year highs.

 

The rally in oil prices has been a welcome development for oil-producing countries. Not so for Nigeria.

 

Africa’s largest crude producer has found itself in a tricky position despite the crude prices trading to their highest level since 2014.

 

Oil sales make up a massive amount of Nigeria’s export earnings and government revenues.

 

However, the terrible combination of sub-optimal oil production, importing refined products, and petrol subsidies have turned a blessing into a curse.

 

If geopolitical tensions intensify and prices remain at elevated levels beyond $100, Nigeria stands to lose rather than gain.

 

Despite being Africa’s largest crude producer, Nigeria exports the global commodity but imports all by-products due to weak infrastructure. So as oil prices appreciate, this will support export earnings but also eat into foreign exchange earnings. To add insult to injury, whatever profit is left is drained by petrol subsidies which have cost the Nigerian government up to $7 billion a year in revenue.

 

Back in November 2021, the Nigerian government announced it will remove the subsidies. Fast forward to today, the removal of the subsidies has been delayed because of the general elections in 2023. With the government being forced to draw $2.2 billion from the Eurobond it issued last September to fund the fuel subsidies, things are not looking pretty for the federal government or economy.

 

Even if the subsidies were to be removed in the future, the question is whether Nigeria is strong enough to weather the ramifications of such a move. What will be the social-economic consequences? How about inflation? What will the Central Bank of Nigeria do to shield the economy? These are just a handful of the questions that need to be answered before Nigeria decides to pull the plug on fuel subsidies.

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