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What to expect as petrol subsidy removal nears

Nigeria is not ready for subsidy removal

As the date for the removal of the controversial petrol subsidy draws closer, Nigerians are becoming increasingly anxious about what to expect in the coming months.

The federal government has said that the product will be deregulated before President Muhammadu Buhari’s tenure ends on May 29, 2023.

Analysts say that once the subsidy is removed, the country will experience higher cost of petrol, increase in transport fares, higher cost of living and increased cost of goods and services.

“When the subsidy is removed, there will be an increase in the price of petrol. This will also lead to additional cost of goods and services as a result of increase in transportation cost,” said Jide Pratt, chief operating officer of Aiona and country manager of Trade Grid.

Last week, oil marketers and other stakeholders in the downstream sector of the Nigerian petroleum industry said petrol prices in Nigeria may hit N750 per litre if subsidy is removed.

Mike Osatuyi, national operations controller at the Independent Petroleum Marketers Association of Nigeria, said during a virtual workshop that the projected pump price may drop to around N500 if the government encouraged the Central Bank of Nigeria (CBN) to provide foreign exchange for marketers at the official rate.

Osatuyi urged the government to channel expected savings from subsidy removal to the provision of palliatives for the masses. He, however, advised the government to be alert and sensitive to resentment from Nigerians.

According to Pratt, subsidy removal will heighten inflation if the government does not put measures in place on the fiscal and monetary sides of its policy.

“We must increase our productivity and production capacity and investment drive for Foreign Direct Investment (FDI). With deregulation, more investment will also come in,” he said.

“Initially Nigeria can expect a tough transition on deregulated petrol. It will reduce the arbitrage and incentive for smuggling as price parity will be achieved and as such, our demand will drop.”

Pratt said states that are farthest away from sea ports and are landlocked would see highest petrol prices.

In addition, the removal of fuel subsidy will also worsen the cost of living for Nigerians. This is because the prices of basic necessities such as food items, clothing, and housing are expected to rise due to the increase in petrol prices.

Labour unions have argued that removing subsidies will raise the cost of living, insisting the government must fix its refineries before there can be a discussion on subsidy removal.

On how Nigeria can ease the situation, Pratt said the shift in transportation fuel from petrol to gas, either through Compressed Natural Gas (CNG) or Liquefied Petroleum Gas (LPG), for cars and buses that are for mass transit and goods movement, must be subsidised by the government.

Read also: Why Nigerians prefer NNPC petrol stations to others

He said the subsidy should go into engine conversion, and Innoson motors can be used to drive this production.

“Also, with the Dangote refinery, we become a net exporter of petroleum products and also this creates a better balance of trade for the nation,” he said.

Clement Iganugo, economist at Financial Derivatives Company Limited, said during an interview on Arise News on Wednesday said there is going to be a decline in consumption for the poor as subsidy is removed.

To cushion the effect of petrol subsidy, Iganugo said the savings from subsidy removal should be channelled into health care services and other vital infrastructures in the country.

“The infrastructure stock in Nigeria is about 35 percent, while the average for developing an economy is 70 percent. We need to invest in productive infrastructure that will have a direct impact on the households and firms,” he said.

“Nigeria is one of the countries with the least minimum wage. If you are going to take away subsidies, you are going to reduce the real income of citizens.”

According to Iganugo, the government needs to go back to the minimum wage and review it for the vulnerable. “Government should focus on taking this money back to the poor when they take it out from the racket,” he said.