A nationwide strike against fuel subsidy reform, coupled with unprecedented outbreaks of Islamist violence, has abruptly ended any honeymoon Nigeria’s six-month-old government might have been enjoying. But while the pressure has stalled one reform, it is encouraging others. Subsidized petroleum was one of the few benefits Nigerians enjoy from the country’s crude oil exports. That at least was the argument trade unions employed last month to mobilize a six-day strike against the government’s decision to remove the subsidy on January 1. ‘Remove corruption, not [the] subsidy’ was one popular slogan of the protests accompanying the strike.
The macroeconomic necessity of getting rid of the subsidy is made more urgent by the country’s decrepit downstream energy sector. Refined petroleum products make up about a fifth of Nigeria’s import bill, and during the past five years the cost of wholesale fuel imports and subsidies has shot up in line with booming domestic demand and global oil prices.
“[We] suffer from an oil-price shock even though we’re an oil-exporting country,” central bank governor Lamido Sanusi admitted to Euromoney in an interview late last year. Sanusi said the late 2008 oil-price collapse and the subsequent falls in the value of collateral against trade financing were a primary cause of the central bank’s rescue of 10 domestic banks in 2009.
Partly to counter risks to the banking sector, in 2010 the government started issuing petroleum importers sovereign debt notes, which are discountable at the central bank. But looser fiscal policy since 2009 has coincided with higher global prices for food and fuel, so the central bank has been forced to shore up the exchange rate via hikes to monetary policy. The base rate is now 12%.
Nigeria’s four oil refineries, which are state-owned, are operating well below capacity. According to local press, after the strikes last month, the Nigerian National Petroleum Corporation (NNPC) had designed a revitalization plan to get three of the refineries up to 90% capacity by the end of 2013.
Meanwhile, in the longer term, removing the fuel subsidy will make private-sector refineries more viable. But Nigeria needs wider reform to its energy sector to make this happen. Most importantly, a wide-ranging Petroleum Industry Bill has been pushed back and forth among officials in the capital Abuja for more than three years.
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| Nigerians protest against the repeal of the fuel subsidy |
It is hoped the bill will give investors clearer policies on tax and royalties, while moving towards more indigenous ownership of upstream assets, and break up the NNPC into commercially oriented and independently financed sub-units. Once the bill is passed, it is hoped more oil production will be routed to domestic demand.
Unions called off their strike against the subsidy removal on January 17 after the government reinstated around 57% of the subsidy. But the strike was big enough to cost the economy some $1.3 billion, according to the National Bureau of Statistics – about 0.7% of GDP.
Partly in response, on January 19 the government established a broad-based task force, which has been given 30 days to agree on a new energy bill to present to the legislature. The task force includes members of the government, the National Assembly, the NNPC, and trade unions, and it is chaired by Udoma Udo Udoma – head of one of Nigeria’s biggest private-sector conglomerates.
In addition, the government has ordered the Economic and Financial Crimes Commission – an anti-graft agency set up under former president Olusegun Obasanjo – to investigate the much-maligned mechanism by which the subsidies are paid. According to Abuja newspaper The Nation, the agency is questioning some 38 private energy marketing firms, as well as the Petroleum Products Pricing Regulatory Authority, part of the NNPC.
Although some are sceptical as to the difference it might make, Pabina Yinkere, head of research at Lagos investment firm Vetiva, says the investigation is unprecedented in Nigeria’s petroleum industry. “This is something many Nigerians have always called for,” he says.
The government says it has allocated cash that would otherwise have been spent on the subsidy to a reinvestment programme. This will provide financial backing to large developmental projects: oil refineries, as well as transport and electricity infrastructure, where capacity is similarly inadequate.
The protesters expressed doubts as to whether the saved cash would be put to good use, but the government has moved ahead with reforms to the electricity sector.
After surmounting opposition from workers via pay increases and other benefits, on December 31 electricity minister Barth Nnaji officially liquidated the monopoly Power Holding Company of Nigeria – once known popularly as Please Have Candle Nearby. According to research from Renaissance Capital, more than 300 companies have expressed interest in buying one or more of the 18 successor generation and distribution companies from the government.
In coming weeks, the electricity regulator is due to reveal details of a planned electricity tariff increase to make investments in the sector more attractive. The union’s reaction remains to be seen – and violence in the country’s north seems to be getting worse.
