As Nigeria anxiously expects oil prices to rise to a comfortable position and boost the country’s confidence to recover from the current shock, analysts have warned that such anticipated rise would instead present grave political risks to the country.
The collapse in oil prices has led the federal government to remove the decade-long wasteful subsidy on petrol imported into the country, a major sensitive issue that had defied implementation for years due to over-politicisation.
Although the decision will save President Muhammadu Buhari’s government at least $2 billion a year, at a time the country needs funds to deal with the COVID-19 pandemic, it is also a politically fraught move – a rebound in oil prices could rouse the opposition and test the regime’s resilience. Previous attempts to wean Nigerians off cheap gasoline (petrol) have led to major anti-government protests.
Bloomberg quoted a senior analyst at the Lagos-based SBM Intelligence, Cheta Nwanze, as saying, “Given the relationship Nigerians have with cheap fuel, rising oil prices will have a significant political cost. Buhari could use security services to put down protests that are likely to erupt.”
The abolition of the subsidy saw Nigerians paying between N123 ($0.32) and N125 per litre for petrol, the lowest price in a decade, according to the Petroleum Ministry.
“How much people pay in future will be determined by market forces,” Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mallam Mele Kyari, reportedly said while justifying the removal of fuel subsidy.
In six decades of pumping crude, Nigeria has produced some of the continent’s best-known billionaires, while at the same time creating a deeply unequal society in which almost half its population lives in extreme poverty. For a vast majority of its 200 million people, cheaper fuel is the only benefit they see from a state that built no social-safety net for its citizens during the oil boom.
When Buhari’s predecessor, Goodluck Jonathan, tried to scrap the subsidy in 2012 and petrol prices surged, he faced two weeks of protests and riots before demurring and reversing the decision. The political damage Jonathan suffered as a result purportedly contributed to his defeat in elections in 2015.
However, Buhari has few options: with government revenue projections decimated because of the pandemic, not only will the measure save money, it will also provide funds that are urgently needed for capital investments to aid the diversification of the economy.
Whether the government reverses the scrapping of the subsidy will largely be determined by the severity of the fiscal crisis it is facing. The International Monetary Fund (IMF) last week approved $3.4 billion in emergency funding to Nigeria, the single biggest tranche disbursed for any country so far to fight COVID-19.
“If the government subsequently had to sign on to a full-fledged IMF programme, that would probably seal the end of the subsidy regime,” Vice President of London-based Teneo Intelligence, Malte Liewerscheidt, told Bloomberg.
Since the start of the year, Brent crude, which compares with Nigeria’s export grades, has slumped 36 per cent, bludgeoned by a lack of demand due to the pandemic and a ruinous price war between Saudi Arabia and Russia. Nigeria, which has relied on crude exports for two-thirds of government revenue and more than 90 per cent of export receipts in the past decade, is staring recession in the face for the second time in four years.
The government would have had more room to manoeuvre if the country produced its own petrol. But four state-owned refineries built between the 1960s and 1980s to process 445,000 barrels of crude daily have fallen into disrepair, barely functioning at a fraction of their capacity.
Much of the country’s hopes for achieving self-sufficiency in fuel refining are now pinned on the 650,000-barrel-per-day Dangote Petroleum Refinery that is scheduled to come on stream in the second half of 2021. Owned by Africa’s richest man, Aliko Dangote, it will produce enough to meet Nigeria’s daily consumption of about 300,000 barrels of oil and have extra for export. It will also mean the government won’t have to import refined fuel, saving shipping and landing costs that will help lower the cost of petrol.
