There is currently a lot of unrest in Nigeria. In addition to protests against fuel hikes, there is also religious violence attributed to the Islamist group Boko Haram, which saw about 80 people killed. Both these developments have lead to worries about stability in Nigeria and the effects of the removal of the subsidy on consumer spending, and thus saw marginal market and exchange rate weakness.
Removal of petrol subsidies
The Nigerian authorities have for a while been talking about the removal of the subsidies on petrol (Petroleum Motor Spirit) which in 2011 was estimated to have cost government over US$ 6 billion. On 1 January 2012, the Petroleum Products Pricing Regulatory Agency (PPPRA) announced the removal of the subsidy, and that petroleum providers would not be paid a subsidy after this date.
This action led to:
• A rise in official petrol prices from US$0.40/litre to US$0.86/litre;
• An estimated rise in black market petrol prices from US$0.62/litre to US$1.23/litre; and
• Reports of a tripling in petrol prices in remote areas of the country.
Effect on inflation
In previous Nigerian MPC meetings, members had raised the removal of fuel subsidies as a major upside risk to the consumer inflation outlook. At that time, we expressed a view that the removal of fuel subsidies would not have a dramatic effect on inflation, since subsidies apply to petrol and not diesel, which is what is used for trucks and busses to transport goods (food and other manufactured products) and public commuters. Furthermore, transport has a 6.5% weighting in the inflation basket. In November 2011, transport inflation rose 10.38 y/y and 0.9%m/m, contributing only 0.064% to the annual inflation count.
We also believe that the dramatic rise in fuel prices will lead to a decreased use in private heavy vehicles such as SUVs which are popular in Nigeria. Tariff hikes on electricity do pose a threat, but may act to subdue electricity demand or usage.
Thus overall, we can expect that the increased prices in motor fuel will have an effect on inflation, reaching 14% by mid 2012, but will be dampened by decreased use, dimmed consumer expenditure, as well as the small weight of transport in the inflation basket.
Reform necessary
The fuel subsidy has been bemoaned by many as costly. Nigeria was living beyond its means. The reform of the petroleum sector, as well as the removal of the subsidy, was long overdue even though we believe a more gradual approach should have been taken. The removal of the subsidy will fare well for the country’s budget balance. The funds, as stated by the minister of finance, can be used to build transport infrastructure, which is important for growth in the medium and long term. It will also allow the government to direct more money towards Foreign Exchange Reserves and thus be better able to manage the currency and defend it against shocks.
IMF head Christine Lagarde made a similar observation on her recent visit to Nigeria, stating: “Nigeria recognizes the need to maintain the reforms and policy implementation… Nigeria’s own Transformation Agenda presents a worthy platform to guard against risks and promote shared growth”. She also said that it was “vital that natural resource revenues be channeled more effectively toward the infrastructure investment needed for growth and jobs”.
We expect that there will be continued uprisings against the action to remove the fuel subsidies, emanating both from labour and other sectors of society. The House of Representatives in Nigeria also called on the Federal Government to suspend the fuel subsidy removal and allow for further dialogue. However, it is unlikely that government will reverse this action.
Xhanti Payi
Assistant Economist