January 28, 2022/CSL Research

Following the decision to retain the controversial subsidy payments in the short to medium term, the Federal Executive Council (FEC) at its weekly meeting in Abuja yesterday, approved N3trn (17.5% of the total budget of N17.126trn for 2022) for subsidy payments in 2022. The approved 2022 budget already has a deficit of N6.39trn, implying a possible increase in government borrowings in 2022 with an additional N3trn in expenditure. The Nigerian Petroleum Industry Act (PIA), which was enacted into law in August 2021, provides for the complete deregulation of the downstream sector. The initial commencement date of February 2022 had been earlier postponed till July 2022.

Based on news reports, the increase in global crude oil prices pushed the landing cost of Premium Motor Spirit (petrol) to over N282 per litre as of 20 January 2022 when Brent crude rose to US$89.75/bbl. The further rise in the landing cost of petrol means increased subsidy as the pump price of the product remains at N162-N165 per litre. In 2020, a steep decline in global crude prices triggered by the pandemic completely wiped out the subsidy via significantly lower landing costs, paving the way for a reduction in the pump price of petrol in mid-March and talks of deregulation. The PPPRA announced a reduction in ex-depot price to N113/litre and the official pump price to N125/litre. Between June and November 2020 however, the petrol price was revised four times, rising from N121.50–N123.50 per litre in June to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September and N162-N165 in November. Since November 2020, however, the government has been unable to revise the pump price of petrol despite increasing crude prices to avoid a backlash from the severely impoverished populace.

Since the bold talks around the removal of subsidies came up again last year and the finance minister announced the elimination of subsidies by July 2022, we have always argued that removal of the subsidies is a political sensitive discourse and the present government will be reluctant to bite the bullet in a pre-election year (See CSL Nigeria Daily 26 November 2021). The subsidy on petroleum is widely seen as a form of social security in a country where health and social security provision is non-existent. Though the removal of the subsidies will most certainly help the government already strained finances, it will put pressure on the already stretched Nigerian consumer and small businesses.

For the ruling party, APC, a combination of weak macroeconomic conditions, worsening insecurity and perceived nepotism (and/or ethnic considerations) in making appointments has caused President Muhammadu Buhari’s popularity to wane significantly. An attempt to eliminate the subsidies may worsen the situation for the party as a whole, and this must have been a primary consideration in the decision not to do so. That said, we believe the government will, at some point, have to swallow the bitter pill. However, we are eager to see to what extent the commencement of local refining at the Dangote refinery will bring down the landing cost of petrol. According to the management, operations should commence in the third quarter of the year.