Nigeria to End Gasoline Subsidy Accounting for 25% of Government Spending

Nigeria, Africa’s top oil producer, said it’s scrapping gasoline subsidies that account for about a quarter of government spending to free up funds for building infrastructure such as power plants and roads.

President Goodluck Jonathan’s administration says ending the fuel allowance will help save 1.2 trillion naira ($7.5 billion) this year, or about 25 percent of the government’s 4.8 trillion naira spending plan. The money will be channeled instead toward capital projects.

“The downstream sub-sector of the petroleum industry is hereby deregulated,” Reginald Stanley, executive secretary of the Petroleum Products Pricing Regulatory Agency, said in an e- mailed statement in Abuja yesterday. “Service providers are now to procure products and sell same in accordance with the indicative benchmark price” published fortnightly by the PPPRA.

“Removing the fuel subsidy will address significant inefficiencies in the economy and ultimately create the right environment for private-sector participation in the refining business,” Samir Gadio, a London-based emerging-market strategist at Standard Group Ltd., said by e-mail yesterday. “The fuel subsidy has translated into a sizable fiscal cost for the government which is not sustainable.”

A liter of unleaded petrol in Abuja currently costs about 65 naira (40 U.S. cents). That price may more than double to 140 naira with the removal of the subsidy, the PPPRA has estimated.

Strikes Planned

The decision, which central bank Governor Lamido Sanusi said will boost inflation in the “short term,” is unpopular among Nigerians and has been extensively debated in parliament.

“We alert the populace to begin immediate mobilization towards strikes, street demonstrations and mass protests,” the leaders of Nigeria’s two main labor federations, Owei Lakemfa of the Nigerian Labour Congress and John Kolawole of the Trade Union Congress, said in a joint e-mailed statement. Dates will be announced in the next days, they said.

Nigeria’s House of Representatives late in 2011 rejected the removal of fuel subsidies as being “premature,” John Enoh, chairman of the House budget committee, said Dec. 2.

Still, the decision likely will be approved later in January by the Senate, which has the power to override the House’s decision, and thus be formally authorized, analysts have said. Moreover, the government hasn’t included any funds for the fuel subsidy in its 2012 budget.

Refining Investment

Nigeria has paid 3.65 trillion naira in domestic fuel subsidies since 2006, with more than a third spent in 2011, according to the PPPRA. The government spent 1.35 trillion naira in the first nine months of last year, PPPRA chief Stanley told a parliamentary hearing on Dec. 2.

The government predicts its budget deficit will narrow to 2.8 percent of gross domestic product in 2012 from an estimated 3.0 percent in 2011.

The removal of the subsidy will set the basis for investment into the downstream sector of the petroleum industry, Bismarck Rewane, chief executive officer of Financial Derivatives Co. Ltd., a fund manager, said yesterday by phone from Lagos, the country’s commercial capital.

Oil retailers including Oando Plc (OANDO), Nigeria’s largest retailer of refined products which plans to invest in a new refinery project, and Conoil Plc (CONOIL) “will have to be more efficient to be competitive,” Rewane said.

Nigeria, Africa’s most populous nation with more than 160 million people, imports 70 percent of its fuel products due to a lack of adequate refining capacity, Petroleum Minister Diezani Alison-Madueke said on Nov. 22.

To contact the reporter on this story: Elisha Bala-Gbogbo in Abuja at ebalagbogbo@bloomberg.net

To contact the editor responsible for this story: Dulue Mbachu at dmbachu@bloomberg.net

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