Nigeria’s Bid to End Fuel Subsidy Comes at Good Time for Dangote

With petrol scarce and his fuel tank on red, taxi driver Victor Ovundah queued overnight at a gas station in Port Harcourt, Nigeria and by morning was getting close to filling up when sales suddenly stopped.

A man started going from pump to pump, tapping on each console. The digital dashboard flashed: 897 naira ($0.56) per litre. The 34,000 naira needed to fill up his Toyota Corolla moments before was now 50,000 naira. A 45% increase in the blink of an eye.

 

“Our WhatsApp group for Bolt drivers was blowing up with complaints, it seemed the price change was well planned,” he said. “How are we supposed to make a profit with this new fuel price?”

Public frustration is just one consequence for Nigeria as it once again tries to end a costly addiction to fuel subsidies.

The move could fan inflation and risks re-igniting cost-of-living protests. But it may wean the country off a reliance on imported gasoline, which cost it around $10 billion in 2022, just as the local refinery of billionaire Aliko Dangote starts to deliver a home-grown product.

 

It also gives the West African nation a chance for a do-over in efforts to end the years-long practice of providing cheap fuel.

 

President Bola Tinubu declared subsidies were finished after taking office in May 2023. That decision and other reforms were cheered by observers, including the World Bank and International Monetary Fund. But they jolted inflation to a 28-year high and Tinubu quietly backtracked on fuel to dampen popular protest.

The cost of reintroducing the subsidy was left with the state-owned oil company NNPC Ltd. It’s financial statements show the decision pushed it into heavy debts owed to gasoline importers, who local media reports said have since halted supplies until they get paid.

NNPC declined to comment on whether it was raising gasoline prices, but it acknowledged reports regarding the company’s significant debt to petrol suppliers.

“This financial strain has placed considerable pressure on the company and poses a threat to the sustainability of fuel supply,” it said in a Sept. 1 statement posted on X.

Its 2023 financial statements show fuel subsidies cost the NNPC 3.3 trillion naira between January and May, and 1.8 trillion naira from August, when the grant was reintroduced, to December. It’s also owed 7.8 trillion naira for the seven months to July this year, according to Chief Financial Officer Umar Ajiya.

Those amounts will come out of what it would otherwise pay to the government.

In addition to a fiscal impact, gasoline shortages have led to miles-long queues at gas stations in cities including Abuja and Lagos, the commercial hub, as drivers wait for hours to fill up.

With this week’s price rise, gasoline is closer to a market level, a move welcomed by industry experts because it highlights the harm done by subsidies.

“At least now we know who is bleeding and how it is impacting negatively on the downstream petroleum supply sector,” said Billy Harry, head of an association of fuel station owners.

The price increase could also complicate the central bank’s task as it fights inflation and tries to stabilize the naira. But it creates an opportunity for Dangote, whose massive 650,000 barrel-a-day plant near Lagos is beginning to produce gasoline.

“This will eliminate all fuel queues in Nigeria,” Dangote told Arise News in a Sept. 3 interview. “This will also make sure that there is consistent supply to the market.”

His refinery, which took a decade to bring online, could transform the country’s dependence on gasoline imports, which are paid for in dollars, stoking inflation and draining reserves.

Nigeria’s downstream regulator said in a statement on Tuesday that a deal had been reached to sell crude to the Dangote refinery in naria, easing both the gasoline shortage and pressure on the currency, which has lost around 70% of its value against the dollar since last year.

“The refinery is now poised to supply an initial 25 million litres of gasoline into the domestic market this September and will subsequently increase this amount to 30 million litres daily from October 2024,” the regulator said in a statement on X.

Dangote offers a good opportunity to finally sell gasoline at market prices in Nigeria, said Harry, of the retailers’ association.

“We have seen with the scarcity that people are buying products at black-market prices that sell for much higher. The only way to go is by allowing gasoline to sell at the prevailing market price,” he said.

That sounds good on paper but there are real-world risks of ending fuel subsidies.

Public fury over the high cost of living fanned protests that brought parts of the country to a standstill in early August and led to the death of at least 21 people.

One of the key demands of protesters was for the pump price to fall back to pre-May 2023 levels of 250 naira per liter. They’re preparing for more demonstrations in October, when the nation celebrates independence, but may return to the streets sooner.

Labor unions could also balk at higher pump prices. They agreed to a new minimum monthly wage of 70,000 naira in August after a government promise that petrol prices wouldn’t rise.

“We are filled with a deep sense of betrayal as the federal government clandestinely increases the pump price of gasoline,” Joe Ajaero, President of the Nigeria Labour Congress, said in a statement demanding the increase be reversed.

Source:norvanreports.com