Petrol prices in Nigeria rise as subsidy regime cracks – EIU

On July 19, fuel marketers increased the price of petrol from N165 (40 US cents)/litre to prices ranging up to N189/litre across Nigeria.

The Nigerian National Petroleum Corporation (NNPC) also formally launched its transition to a private limited liability company, in line with the provisions of the Petroleum Industry Act (PIA), which was passed in 2021.

Why does it matter?

This is the first sign that Nigeria’s exorbitant fuel subsidy regime is weakening. We assume that market-led pricing will begin from 2023, which brings a sizeable risk to political stability. However, it is necessary for both the national oil company, the NNPC, to become commercial (and not sell petrol to marketers below cost), according to the provisions of the PIA, and to allow Nigeria to eliminate petrol imports as a new mega‑refinery comes on stream, which we expect in 2023.

In late June the Nigerian Midstream and Downstream Petroleum Regulatory Authority denied reports that it had approved increases in the regulated price of petrol.

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The NNPC has also rebuffed claims that it is responsible. While the government has not formally acknowledged the price increases, fuel marketers are unlikely to have adjusted their pump prices at the same time without authorisation.

Assent by the authorities would in any case be covert, as any official confirmation might trigger public protests, but the government will be desperate to get some relief regarding the ballooning subsidy bill, which will cost the government up to N4trn ($9.6bn) in 2022. Our forecast is for this to result in the highest fiscal deficit for a generation, of 5.3 percent of GDP.

Our view is that the petrol subsidy is unsustainable but also unavoidable, given the proximity of a general election in February 2023. If the government let prices be guided by the market (as it had attempted in 2021), there would be no chance of the ruling party winning at the polls.

The authorities will still be shaken by the mass protests that took place in 2021, initially about police brutality but which swiftly evolved into mass unrest about high petrol prices and the cost of living generally. The unwinding of petrol prices is a serious risk to political stability, but the evidence appears to be pointing in the direction of it happening. On July 19, for example, the NNPC officially became a limited liability company as the powers of the PIA slowly advance.

What next?

The price increase is the first sign that the subsidy regime is cracking and supports our forecast for more market-led pricing from mid-2023. This will keep inflation high in 2023 (at an average of 13.8%) but offer a reprieve for the public finances.

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