Nigeria’s dollar bonds posted the biggest losses among global emerging markets Thursday after the Federal government signaled its plan to remove energy subsidies would now be delayed beyond an earlier June 1 deadline. The pronouncement shook the confidence of investors with many fearing that Nigeria’s fiscal crisis will worsen by the action to delay subsidy removal.
Debt due 2051 fell almost 2 cents on the dollar to post the worst performance among 645 bonds in the Bloomberg Emerging Markets Sovereign Index. Eleven other notes with different maturities from the nation figured in the 20 largest losers after Nigerian newspapers reported the collapse of the subsidy removal plan.
The subsidy plan can’t be ended while the government transition is in progress, said Finance Minister Zainab Ahmed, according to a briefing. After the new president is sworn in on May 29, the National Economic Council could either advise to wind up the plan immediately or extend it beyond June.
“Everybody agrees that the subsidy should be removed very quickly because the cost is only not efficient but is also not sustainable,” Ahmed stated. “What I said is that it is not going to be removed now, which means it will not be removed before the transition is completed.”
According to a report by BusinessDay, the removal of the subsidy at this time had become a political minefield, especially after the anger over the currency exchange farce and the pain it caused the poor in Nigeria.
The finance minister now says preparatory work to remove the subsidies should continue in consultation with all key stakeholders, including members of President-Elect Bola Tinubu’s incoming administration.
“If the committee’s work determined that the removal can be done by June then the work plan will be designed to exit as at June,” she said. If the determination is that the period is extended, it will mean that the country will have to “revisit the Appropriation Act, for example.”
President Muhammadu Buhari’s outgoing government had fixed June 1 to exit the fuel-subsidies arrangement, which is forecast to cost Nigeria at least $13 billion this year. It had set aside reserves to cover the expense for the first six months of the year only, meaning the government may have to prepare a supplementary budget to cover the additional cost.
Africa’s biggest economy is already in a dire fiscal situation after spending 96% of revenues servicing debt in 2022. Removing the subsidies, which consume almost all of oil earnings, was expected to ease the fiscal pressures.
Buhari is leaving the decision on subsidies to Tinubu, who pledged during the election campaign to end the costly payments.
The decision to suspend the subsidy removal will mean that the government must now submit a supplementary budget to the National assembly to avoid a situation where the government runs out of money to spend.
The announcement has been condemned by some commentators. Deputy-President of the Lagos Chamber of Commerce and Industry (LCCI), Gabriel Idahosa, criticised the Federal Government for lacking the political will to do the needful and end fuel subsidy for the better, noting that on several occasions, interest groups such as the LCCI as well as economists and financiers across the country had advised the government to bite the bullet and end a subsidy regime that has significantly damaged the economy.