Barely a week after Venezuela made a historic policy shift by raising fuel prices after decades of subsidies, Nigeria took further steps in announcing to the world that it was also ditching its longstanding wasteful petrol subsidies.
The Petroleum Products Pricing Regulatory Agency (PPPRA), the regulatory body in charge of fixing the price of petrol in Nigeria, announced the removal of the price cap on the retail price of petrol in a notice published on its website on Thursday.
The PPPRA said a market-based pricing regime would now determine the price of the product in a historic move that will help state oil company, NNPC, to pare loses incurred subsidizing petrol and boost government cash flow while opening the downstream sector to private investments.
Nigeria had in March announced that the retail price of petrol would be adjusted monthly to reflect realities in the global crude oil market after being forced by the impact of the COVID-19 pandemic on government revenue to do away with a subsidy practice that gulped over a trillion naira annually, more than the federal government’s health and education budget combined.
One of the recommendations of the Economic Sustainability Committee chaired by Vice President Yemi Osinbajo was the deregulation of the downstream petroleum sector and introduction of excise duties on petrol.
The new regulation by PPPRA suggests all marketers can import PMS and sell at a price they desire, according to Omotola Abimbola, an analyst at investment bank, Chapel Hill Denham.
Abimbola however reckons that there remains one stumbling block on Nigeria’s way in its quest to achieve full deregulation.
“However, in reality, Nigeria cannot really have a fully deregulated downstream market without collapsing the multiple exchange rate structure into a single market,” Abimbola added.
“A major hurdle oil marketers have to cross is lack of FX liquidity. Given the recovery in oil prices in recent days, and the FX rate in the more liquid parallel transfer market, it might be unprofitable for marketers to import and retail PMS at current price of N121.50 – N125 by Q3,” Abimbola added.
If the NNPC continues to import based on the official FX rate of N360 per dollar, marketers may continue to rely on NNPC for supply, except the CBN creates a special window for oil marketers to obtain FX at the same rate which will equate to an FX subsidy.
The PPPRA said it “shall monitor market trends and advise the NNPC and oil marketing companies on the monthly guiding market-based price.
“The price of premium motor spirit advised by the agency shall be the guiding retail price at which the product shall be sold across the country,” the agency said.
The announcement has been greeted with cautious optimism.
“A truly historic moment if indeed “guidance” on petrol prices continues to remain strictly guidance,” said Seun Smith, an economist.
“Real test will come when prices start rising. But for now let’s celebrate the win,” Smith said via his twitter handle.
The Oil and Gas Index on the Nigerian Stock Exchange (NSE), which tracks publicly-listed upstream and downstream stocks declined 0.96 percent while the All Share Index fell 1.17 percent.
“The removal of the fuel subsidy, which happened with a whimper rather than a shout is very good news, assuming that it doesn’t get reversed when oil prices rise,” Andrew Alli, former CEO of the Africa Finance Corporation (AFC) said.
“It is a pity it only happened now and I shudder at the vast amount burnt on it. But it is progress nonetheless,” Alli said.
Africa’s biggest oil producing country spent over N2 trillion on subsiding the price of petrol in just three years, an amount which was far higher than funds allocated to education, health, defence, and agriculture in that period.
For decades, the Nigerian government has heavily subsidised electricity and petrol, paying the difference between the cost of production and the cost charged to customers in order to make them more affordable, but in the end, the practice dug a costly hole in government revenue, deterred private investment and had little impact on the poor it sort to protect.
The subsidy has been widely criticized by local and foreign economists as well as multilateral agencies from the International Monetary Fund (IMF) to the World Bank.
The cash guzzling practice is one of the conditionalities that the World Bank is asking Nigeria to fulfill to draw down on a $1.5bn loan and was also part of the promises the government made to the IMF in accessing a $3.4 billion loan in April.
Some analysts are still holding out until the subsidy removal is backed by legislation and agencies like PPPRA and PEF are scrapped or take on new roles to believe that the government won’t revert back to subsidies when oil prices rise.
In Venezuela, gasoline will now be sold at 5,000 bolivars (2.5 U.S. cents) per liter at gas stations nationwide, including 200 stations that will sell premium fuel at the equivalent of 50 U.S. cents a liter, Maduro said last week.
The announcement followed the arrival of five Iranian tankers loaded with around 1.5 million of barrels of gasoline as Venezuela faces a crippling fuel shortage, following years of mismanagement, lack of investment and mounting U.S. sanctions.
An overhaul of the country’s gasoline distribution system represents a stark shift in national culture, loosening the state’s monopoly over the country’s central asset. It means state oil company, PDVSA would recover millions currently lost in subsidies.
The government announced a similar plan in 2018, but didn’t follow through. It then issued a banking card and a vehicle census for those wanting to apply for subsidized gasoline. Both will used this time, Maduro said.
