Nigeria reinstates fuel subsidies to cushion against naira weakness: IMF

Nigeria has partially U-turned on its pledge to ditch fuel subsidies amid a surging cost of living crisis, the International Monetary Fund (IMF) has said.

Scrapping costly fuel subsidies was a key policy stance of President Bola Tinubu upon his inauguration in May 2023, prompting gasoline prices to double at the pump.

Yet soaring inflation and currency woes have prompted a return to government payouts to cushion customers from price rises, the IMF has said, warning that the move could cost up to 3% of Nigeria's GDP in 2024.

In a statement Feb. 9, the IMF confirmed that the Tinubu administration had "capped retail fuel and electricity prices—thus partially reversing the fuel subsidy removal" to combat the impact of inflation on living conditions, summarizing comments by its Executive Board.

After a visit to Lagos to meet key government ministers, Axel Schimmelpfennig, IMF mission chief for Nigeria, reiterated the global lender's stance against resumed subsidies. In a March 4 statement, he said; "the capping of fuel pump prices and electricity tariffs below cost recovery could have a fiscal cost of up to 3 percent of GDP in 2024." Instead, cash transfers to households should be prioritized over "implicit fuel and electricity subsidies", he said.

According to the IMF, fuel subsidies accounted for 2.2% of GDP in 2022 (around $10 billion), a level which was slashed to 0.9% in 2023 after the policy was abandoned.

Naira spiral, calm retail market

Yet another key policy shift under the Tinubu regime, a floating exchange rate for Nigeria's naira, has put steady pressure on fuel prices.

Since the unification of Nigeria's multiple exchange rates, the naira has rapidly devalued, dropping from around N460 to the dollar March 20, 2022 to around N900 in January 2024. In March 2024, the rate is hovering close to N1500.

Rapid currency depreciation puts significant pressure on Nigerian fuel prices, given the country relies almost exclusively on imports. As a consequence, traders have called attention to relative calm in the retail gasoline market

While Nigeria remains reliant on imports for its gasoline supply, rapid currency depreciation should push costs higher at the pump. Yet traders have pointed to muted price rises in the retail market as a giveaway that the government has swallowed a rising cost burden.

Platts assessed CIF West Africa gasoline cargoes at $956.5/mt March 18, up 6% on the year and around 5.3% on the week, according to S&P Global Commodity Insights, reflecting rising import costs on a dollar basis, before accounting for naira weakness.

Meanwhile Nigerian media has reported petrol prices at fuel stations hovering between N650-N700 per liter, up from around N400-600 in the immediate aftermath of the subsidy removal last year. Analysts have argued that retail price rises cannot reflect surging import costs for Nigeria's Nigerian National Petroleum Company (NNPC), responsible for importing the country's gasoline.

Neither the Nigerian budget office nor state oil firm, the Nigerian National Petroleum Company (NNPC) were available for comment on whether fuel costs are being subsidized by the government.

NNPC eyes import freedom

According to S&P Global Commodities at Sea data, Nigeria has continued to pull steady gasoline volumes despite surging costs, importing around 276,500 b/d in February, up from a 2023 average of 244,500 b/d.

While the NNPC is expected to be swallowing rising costs to continue importing supplies at normal volumes, the commencement of gasoline supply from the country's new Dangote refinery should reduce exposure to currency markets.

At full capacity, the 650,000 b/d refinery is expected to yield some 327,000 b/d of gasoline, however timelines and volumes to be allocated domestically remain uncertain. S&P analysts have said the plant is unlikely to become fully operational before Q3 2024.