Subsidy back as naira slide spares petrol price

…Scanty gains of subsidy removal stand in way of fresh increase

Nigeria’s petrol subsidy has returned with fury.

The exchange rate of the naira to the dollar has declined by 36 percent this year alone and a further 90 percent since September 2023, yet the freefall in the world’s worst performing currency in 2024 has not affected retail petrol prices.

Nigeria ended its popular but costly petrol subsidy practice on May 29 2023 when newly elected President Bola Tinubu scrapped the policy in his inaugural address to the country of 200 million.

The reform paved the way for a tripling in petrol prices. Prices have however barely budged in months as Tinubu blocked further increases to ease a severe cost of living crisis on Nigerians and avert strike actions.

“Subsidy is back one way or the other,” a source familiar with the matter said.

“The movement in the exchange rate alone makes the current pump price untenable,” the source said.

While the average petrol price has moved by only 7 percent since September, the naira has shed 90 percent of its value in that period. When the current pricing template was structured, the exchange rate was N700/$. The rate has now moved by over 100 percent to N1461/$, as of Friday, Feb.2, yet the petrol price has barely changed.

The average price paid for petrol across Nigeria was N671.86 in December 2023, according to latest data from the National Bureau of Statistics (NBS).

Average petrol price in Nigeria has only increased by 7% since September

The World Bank had said since last December that Nigeria has a partial subsidy in place and that petrol should be priced at N750 per litre at the pumps.

“It does seem like petrol prices are not fully adjusting to market conditions so that hints at the partial return of the subsidy, if we estimate what is the cost reflective of retail PMS price of the would-be and assuming that importation is done at the official FX rate,” Alex Sienaert, the bank’s lead economist for Nigeria, said.

“Of course, the liberalisation is happening with the parallel rates, which is the main supplier, the price would be even higher,” Sienaert said.

The naira freefall has made the subsidy burden bigger and is set to eat into the money shared by the three tiers of government.

State-oil firm, NNPCL, already resumed its role as sole importer of petrol in Nigeria since October after marketers downed tools after higher oil prices and the naira depreciation jacked up the landing cost of the product.

Nothing to show for subsidy removal

The government had promised to reinvest gains of the subsidy removal into critical areas of the economy but with 80 percent more cash than they got before, nothing has changed particularly at the state level.

The lack of accountability for the extra cash that has been freed up by the subsidy removal means convincing Nigerians to accept another increase in petrol prices is a tough sell.

Rather than spend the extra cash on improving human capital and infrastructure in their states, sources familiar with the matter say some state governors have been converting their naira cash to dollars, piling pressure on the currency.

“Some of the state governors are choosing to hold dollars rather than naira and that’s why there’s always pressure on the naira/dollar exchange rate after FAAC meetings when the money is shared,” a source familiar with the matter said.