• Thursday, February 29, 2024
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Subsidy removal pushes transport industry into recession

Subsidy removal pushes transport industry into recession

Nigeria’s transport and storage industry shrank for the second time in the third quarter of 2023, entering a recession for the first time in 30 months, largely on the back of petrol subsidy removal, according to a BusinessDay analysis.

The latest Gross Domestic Product report by the National Bureau of Statistics (NBS) showed that the sector in real terms contracted by 35.9 percent in Q3 compared to a negative growth of 50.6 percent in the previous quarter.

“This rate represents a decrease of 77.4 percent points relative to the same quarter of the previous year and an increase of 14.8 percentage points relative to the preceding quarter,” the report said.

It said the contribution of the sector to real GDP in the Q3 was 0.84 percent, a fall from 1.34 percent in the preceding year and lower than 0.89 percent recorded in Q2.

A breakdown of the NBS report revealed that four of the six sub-activities under the transport and storage industry recorded positive growth. The four sub-sectors are rail transport and pipelines, water transport, air transport and transport services.

Road transport, a major contributor to the industry, is also in recession as the sub-sector contracted by 43.65 percent in Q3 from a negative growth of 55.1 percent in the previous quarter.

“The biggest contributor to the decline in road transport is the subsidy removal,” Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, said. “The state of the roads is also contributing to it because when you look at the roads in many parts of the country, they are in a bad shape.”

Ayodeji Ebo, managing director of Afrinvest Securities Limited, said due to higher prices in petroleum products, the devaluation of the naira, and higher crude oil prices, the growth in the transportation sector stayed in the negative.

“The higher transportation cost will reduce customers’ demand and road transport owners’ margins. However, we expect this to improve in the fourth quarter due to the festive season,” he said.

President Bola Tinubu in May scrapped a costly but popular petrol subsidy and lifted currency controls in June, which he said was to save the country from going under.

The removal of the fuel subsidy tripled the petrol price to N617 from N184, causing public transportation providers such as buses, tricycles and motorcycles to raise transportation fares. This situation affected those who rely on public transportation, particularly workers in the private sector.

With higher transportation fares, many Nigerians are forced to allocate a substantial portion of their salaries to cover commuting expenses, leaving little for other essential needs like food and rent.

Adeola Adenikinju, a professor of economics and president of Nigerian Economic Society, said the real income of consumers has gone down, causing the demand for transport services to reduce. “People are just managing the whole situation.”

“The cost of fuel and maintaining vehicles has increased. And the capital stocks or the investment in the sector are very old. The terrible state of roads is being neglected by the government coupled with insecurity,” he said.

According to Samuel Odewumi, a professor and past dean of Lagos State University’s School of Transport and Logistics, transportation is a derived demand and when the transportation sector freezes, the entire economic life of the country comes to a halt, as it is like the bloodstream for the economy.

Data from the NBS shows that the average retail price paid by consumers for petrol in May was N238.1, an increase of 162.9 percent in September (N626.2). The average retail price of diesel also rose from N844.28 per litre to N890.8 in September.

The increase in the cost of petrol led to the average fare paid by commuters for bus journeys within the city per drop to rise by 105.9 percent to N1,337.8 in September from N649.6 in May.

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The average fare paid by commuters for bus journey intercity per drop increased by 47.9 percent to N5,917.16 in September 2023 from N4,002.16 in May.

The high cost of energy is one of the major contributors to the country’s inflation rate, which rose to an 18-year high of 27.33 percent in October from 26.72 percent in the previous month, according to the NBS.

BusinessDay reported in August that the high cost of the fuel forced many workers to drive less to work while others changed their cars.

Joy Osaze, a 43-year-old sales executive with a logistics firm in Lagos, said she had to dump her Honda SUV car because it was consuming a lot of petrol.

She said: “Before the subsidy removal, I was spending between N15,000 and N20,000 weekly on fuelling my Honda Pilot but with the increase in pump prices, I discovered that I spent a minimum of N75,000 weekly on buying fuel, which amounts to N300,000 monthly.

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“I was forced to park my car at home for over two months because the cost of fuel did not add up for me unless I had to be spending my salary on buying petrol only when my other expenses including my children’s school fees were there struggling for the little salary that I earn.”

Many Lagos roads, which used to be notorious for traffic congestion, are now devoid of gridlock except for areas and roads that are full of portholes, which slow down the movement of motorists.

“Nigerians are now more interested in buying cars with good fuel consumption or that have fuel efficiency due to the high pump prices of fuel. Buyers are now cautious in buying cars and they tend to make very thoughtful decisions,” Maxim Makarchuk, chief operating officer of Cars45 and Jiji, said.