Nigeria was long under international pressure to end fuel subsidies that allowed its citizens to pay some of the cheapest petrol prices in the world. But an economic crisis triggered after its new president finally did so has led to questions about how it was handled.
Before the west African country went to the polls last year, the IMF recommended that Nigeria’s government “permanently remove fuel subsidies through the introduction of a market-based pricing mechanism”.
Bola Tinubu, who won the highly contested vote and became president in May, removed them on his first day in office to general surprise but plaudits from the international community. The World Bank called it “the first step towards restoring macroeconomic stability and creating more fiscal space”.
The move was part of the president’s attempt to embrace economic orthodoxy that also included ending a currency peg maintained by the former central bank governor.
But nine months after the subsidies were cut, many are questioning the wisdom of abruptly eliminating the subsidies without a shock-absorbing plan and how Tinubu’s government has implemented its post-subsidy strategy.
An influential local newspaper over the weekend ran an editorial asking whether Tinubu should have heeded the IMF’s advice in the first place.
Nigerians are experiencing the worst economic crisis in more than two decades. Fuel prices have since tripled in Nigeria, leading to increased costs of food and transport. The naira currency has sunk to record lows almost weekly, and has lost about 70 per cent of its value to the dollar since the currency peg ended last year.
“Anyone can remove subsidies or ban something,” said Adedayo Ademuwagun, a consultant at Songhai Advisory, bemoaning the lack of measures to cushion the effect of shock therapy. “But it takes real skill to plan for the big picture. How do you minimise the adversity for ordinary people?”
When the IMF urged Nigeria to cut subsidies, it also advocated for “adequate compensatory measures for the poor and efficient and transparent use of the saved resources”.
Inflation is running at nearly 30 per cent, with the cost of food, a big share of many people’s budget, rising even faster at 35.4 per cent. The cost of imported goods has also risen as the Nigerian currency plummets. In a country where half the population is younger than 18, spiralling prices are causing the worst economic hardship in living memory.
This week, at the first meeting of the central bank under its new governor and the first time it has met since July, the monetary policy committee is expected to raise rates sharply from their current level of 18.75 per cent.
Bismarck Rewane, chief executive of Lagos-based consultancy Financial Derivatives, said removing the subsidies was the “right decision” but questioned how the policy was implemented.
“Removing subsidies was to improve government revenue. And revenues have increased, but they have not been efficiently spent,” he said. “What have they done with it?”
Rewane said the “real challenge” had been stimulating growth in an economy with limited manufacturing capacity. “The level of investment [into Nigeria] has reduced, therefore the country’s growth is stunted.” The economy grew at 2.7 per cent last year, barely ahead of population growth.
Tinubu has bet on economic revival through foreign investment, improving sluggish oil production, a major source of government receipts, and collecting taxes more effectively.
Yet despite enthusiasm for Tinubu’s reforms when they were announced, investment in Nigeria remains far away from the government’s desired level.
Capital importation into the country in the final quarter of last year was $1.09bn, a modest increase of 2 per cent compared to the same period in 2022. High-ranking government officials spent time wooing Gulf states last year for investment. Those trips have yet to bear fruit.
Charlie Robertson, head of macro strategy at asset management firm FIM Partners, said investors needed more time before they would feel safe investing in Nigeria.
“Everyone is still too concerned about the direction of the currency, probably because of the backlog,” he said, referring to the scramble for dollars by foreign companies looking to repatriate revenues to their home countries. Under the previous regime, dollars were in effect rationed, with favoured investors getting hard currency at the official subsidised rate.
Robertson said investors were also deterred by interest rates well below inflation. “With a big rate hike we could be investing in two weeks’ time,” he said, referring to the central bank meeting.
For ordinary Nigerians, who have long viewed low petrol prices as practically the only benefit they receive from a dysfunctional and often venal state, high fuel prices — with their knock-on effect on transport and other costs — are an emotive subject. Instead of cutting the subsidy in one fell swoop, Ademuwagun argues, Tinubu could have tackled the corruption in the subsidy regime, with as many as half of the payments said to be fictitious.
Tinubu promised that the savings would be channelled into social programmes. But Rewane of Financial Derivatives called relief efforts a “racket”, with the government agency tasked with poverty alleviation embroiled in multiple corruption scandals.
A presidential spokesperson did not respond to a request for comment.
If hardship continues social unrest could follow, according to the African Development Bank’s latest country outlook. The Nigeria Labour Congress, the largest confederation of unions, has threatened a nationwide strike at the end of this month if its demands for an increase to the minimum wage and improved public utilities are not met.
There are signs that government resolve is wobbling. One oil industry executive said although it costs about N1000/litre ($0.7) to import petrol, retail prices do not exceed N630/litre ($0.4) at petrol stations.
That suggests what the IMF recently called the quiet reintroduction of “an implicit subsidy”. Tinubu’s government, however, has not publicly acknowledged the move.
“Nigeria’s petrol subsidy saga is a lesson about the fragility of reforms in an economy pushed to the brink,” said Michael Famoroti, an economist and head of intelligence at data firm Stears.
“The decision to implement a market-driven pricing system for petrol well before restoring confidence in the exchange rate market . . . was an unnecessary policy risk”.
Source: Economy - ft.com
