Nigerian Official Fuel Price Increases to Nearly N700
Nigeria is witnessing a significant increase in Fuel Prices as it faces soaring inflation resulting from the removal of fuel subsidies by President Bola Ahmed Tinubu and other economic breakdowns.The skyrocketing prices have affected several products in the market. As of the early hours of Tuesday, July 18, 2023, premium motor spirit (PMS) popularly known as petrol was sold at a price nearing N700 per liter. However, the Nigerian National Petroleum Cooperation (NNPC) filling stations were dispensing their products at the cost of N617 per liter across several parts of the country.
The sudden surge in fuel prices has sparked concerns among economists and the general public as the country is struggling with the aftermath of the redesigned Naira note and other economic mismanagement of the previous administration.
Causes of the Sudden Surge of Fuel Price in Nigeria
1. Fuel subsidy removal:
President Bola Ahmed Tinubu announced the sudden removal of fuel on May 29, immediately after his swearing-in as the new president of the Federal Republic of Nigeria through a controversial electoral process.The removal of fuel subsidies has undoubtedly played a crucial role in the steep increase in prices. Before the subsidy removal, the price of fuel in Nigeria was around N165 per liter until former president Muhammadu Buhari placed it at N243 which was still significantly lower than the current price of N617.
The announcement of the fuel subsidy removal without any economic plan on ground has been described by experts as a great mistake under Tinubu's reign which is just a few months old. Consequently, the cost of transportation and goods has spiked, causing a ripple effect throughout the economy.
Understanding Nigerian Fuel Subsidy and Its Economic Consequences
The Nigerian government had provided subsidies to keep fuel prices low and cushion the impact on consumers for years. The idea of fuel subsidy for Nigerians began in 1973 following global inflation and a spike in fuel prices which took place in the early 1970s. The subsidy was later approved in 1977 and implemented immediately in compliance with the Price Control Act of the year 1977.
The initial introduction of subsidy was based on the idea of the government selling products and services at a more affordable price over other dealers to impose price control but the plan kept changing with successive governments.
The 1970s subsidy was not only about fuel; the cost of education, electric bills, housing, and health services was also subsidized under former president Olusegun Obasanjo's regime.
As it has always been the case in Nigeria, the fuel subsidy was plagued with serious corruption reports and money laundering. The products were paid for at triple prices at the expense of government funds while neighboring countries took advantage through fuel smuggling.
The misappropriation of public funds in the name of subsidy had caused many Nigerians to view the idea of subsidy removal as a saintly motion despite the impending consequences. The preceded governments seeing the cost of the decision have evaded it through political subterfuge. But the rising president already needed to make the public declaration on his first day in office, even without any economic plan.
2. The fall of Naira (Hyperinflation):
Another factor contributing to the surge in fuel prices is the depreciation of the Nigerian currency, the Naira.
The exchange rate has weakened over time, exacerbating the impact of rising fuel prices. As Naira loses its value, the cost of imported goods, including petroleum products, increases. This escalation of costs is eventually passed down to consumers, leading to higher prices at the pump.
Once upon a time in the 1970s, Naira was stronger than the US dollar. But as of Tuesday, July 18, 2023, $1 was exchanged at N776.50 value at the official price and over N800 to a dollar at the black market.
The price of goods in recent years has also gone high beyond survival level. For instance, food products like rice which was sold at N7000 in 2014 under Goodluck Jonathan have risen to N45000 (544% increase).
3. Poor Economic Planning and reckless leadership:
Nigeria became Africa's largest economy in 2014, thanks to the economic team of former president Goodluck Ebele Jonathan led by former finance minister, Ngozi Okonjo Iweala, who is now the IG of the World Trade Organization (WTO).
Following the end of Jonathan's tenure in 2015, President Buhari began his government with Nigeria entering recession in 2016 with the economy contracting to as much as 2.06% at the middle of the year. This was only the beginning of the economic woe under Buhari as more and more affliction was coming including rising inflation and soaring fuel price.
Nigeria's economy under Buhari was nothing to write home about, but posterity would have it as one of the worst governments in the history of Nigeria, at least for now.
Nigeria has been grappling with skyrocketing inflation rates, with the Consumer Price Index (CPI) reaching a five-year high.
Nigeria had an inflation rate of 22.41% to headline inflation of 22.22%, and CPI of 559 index points as of June 2023, according to data by the National Bureau of Statistics.
The removal of fuel subsidies is only expected to worsen the inflationary pressures already gripping the nation.
Fuel is a critical component in transportation, manufacturing, and various other sectors of the economy. As fuel prices surge, the cost of transporting goods rises, thus increasing prices for everyday items.
Following the end of Jonathan's tenure in 2015, President Buhari began his government with Nigeria entering recession in 2016 with the economy contracting to as much as 2.06% at the middle of the year. This was only the beginning of the economic woe under Buhari as more and more affliction was coming including rising inflation and soaring fuel price.
Nigeria's economy under Buhari was nothing to write home about, but posterity would have it as one of the worst governments in the history of Nigeria, at least for now.
The Effects of Nigeria's Fuel Price Increase
- Impact on Inflation
Nigeria has been grappling with skyrocketing inflation rates, with the Consumer Price Index (CPI) reaching a five-year high.
Nigeria had an inflation rate of 22.41% to headline inflation of 22.22%, and CPI of 559 index points as of June 2023, according to data by the National Bureau of Statistics.
The removal of fuel subsidies is only expected to worsen the inflationary pressures already gripping the nation.
- Impact on Standard of Living:
Fuel is a critical component in transportation, manufacturing, and various other sectors of the economy. As fuel prices surge, the cost of transporting goods rises, thus increasing prices for everyday items.In Lagos, the commercial city of the country and the most populous city in Africa, transportation has gone high beyond, whole double. This is just a case study for other cities in the country where a large number of Nigerians rely on public transportation.
This situation has a direct impact on the cost of living for Nigerians, pushing more people into poverty and reducing their purchasing power. Meanwhile, Nigeria is already having 40-60% of its population living in abject poverty representing about 88-130 million people.
- Impact on Security:
Nigeria had struggled with insecurities for years such as the rising religious extremism and Islamic terrorism in the North, as manifested through Boko Haram and ISWAP, banditry, oil theft, kidnapping, and surge in separatist groups like IPOB.The rising insecurity in Nigeria is attributed to several factors one of which is poverty, unemployment, and socio-political inconsistencies.
As fuel price increases, there is surely going to be rising inflation and more people are bound to experience hardship if nothing is done to combat it. This economic hardly will lead to a surge in social vices as criminal organizations would find it easy to recruit new members.
Ramifications for Businesses and the Economy
The increase in fuel prices has severe implications for businesses across Nigeria. Small and medium-sized enterprises (SMEs), already struggling due to the economic challenges caused by the COVID-19 pandemic, the EndSARS revolution, and the Nigerian currency crisis, are now grappling with higher operating costs.
The rising cost of transportation and production is squeezing profit margins and leading to potential job losses and fiscal uncertainty.
Additionally, many industries rely heavily on petrol or diesel to power their machinery and vehicles. Such businesses, including agriculture, manufacturing, and logistics, are grappling with the increased cost of production. The additional expenses are not easily absorbed, leading to a rise in prices for goods and services across the board.
Government's Justification and the Road Ahead
President Tinubu's government argues that the removal of fuel subsidies is necessary to redirect funds toward essential sectors such as healthcare, education, and infrastructural development. This is because the subsidies disproportionately benefit the affluent, hence, redirecting funds sounds like a great way to foster economic growth and development in the long run.
In contrast to this impression, critics object that the immediate impact of the fuel subsidy removal on the average Nigerian is detrimental. They believe that government should have implemented measures to minimize the economic shock of subsidy removal on the most vulnerable segments of the nation.
Suggestions to mitigate the effects of the fuel subsidies removal include gradually phasing out subsidies, implementing social safety nets, and providing targeted support to those affected by price hikes.
What Nigerian Government Has Done to Solve Pump Price Increase
i. Fuel Subsidy Removal Palliative
Following public complaints and pressure on the Nigerian government, it has made moves for a social remediation plan to offer N8000 to poor Nigerian households. This fund known as Subsidy Removal Palliative Fund is expected to reach only people who are in critical economic and extreme social support need.Unfortunately, the fuel subsidy removal palliative comes with a great cost. The Nigerian government had to borrow N500 trillion ($800 million) from the World Bank.
Note that Nigeria is already highly indebted to China and other economic powers and organizations. The country's total foreign debt on March 2023 as announced by the country's Debt Management Office, was N49.85 trillion ($108.30 billion). This amount was projected to reach N70 trillion by June 2023.
Such debt level for a developing country like Nigeria is already a major blow to the economy and a great risk to the value of its currency, the Naira. This makes borrowing to pay subsidy removal palliative more of disadvantage to the Nigerian economy over whatever problem it is meant to solve. Besides, N8000 is just $10 which cannot buy sufficient foodstuff for an average Nigerian household amidst the current inflation rate.
Africa's richest man, Aliko Dangote is building a mega refinery. The petroleum refinery which is located in Lekki's Free Trade Zone, Lagos, Nigeria, is the largest in Africa with the capacity to produce 650,000 barrels of crude oil per day.
Nigeria despite being one of the biggest oil producers in the world has been exporting its raw petroleum products while importing the finished commodity at exorbitant prices. There is no functional refinery to supply enough fuel for the country which consumes more than 100 million litres of fuel per day.
Dangote's refinery on completion is expected to balance fuel prices in the country. But the truth is that none of Dangote's products has been sold in the country at a price much cheaper than standard. Dangote cement is a good example, which sells at very high prices in the country but is cheaper in some African countries. This has made many Nigerians feel that the completion of Dangote's refinery is not still a guarantee for fuel price decrease.
Such debt level for a developing country like Nigeria is already a major blow to the economy and a great risk to the value of its currency, the Naira. This makes borrowing to pay subsidy removal palliative more of disadvantage to the Nigerian economy over whatever problem it is meant to solve. Besides, N8000 is just $10 which cannot buy sufficient foodstuff for an average Nigerian household amidst the current inflation rate.
ii. Hope on Dangote's Mega Refinery
Nigeria despite being one of the biggest oil producers in the world has been exporting its raw petroleum products while importing the finished commodity at exorbitant prices. There is no functional refinery to supply enough fuel for the country which consumes more than 100 million litres of fuel per day.
Dangote's refinery on completion is expected to balance fuel prices in the country. But the truth is that none of Dangote's products has been sold in the country at a price much cheaper than standard. Dangote cement is a good example, which sells at very high prices in the country but is cheaper in some African countries. This has made many Nigerians feel that the completion of Dangote's refinery is not still a guarantee for fuel price decrease.
Conclusion on Nigerian Fuel Price Increase
The removal of fuel subsidies by President Tinubu has led to soaring fuel prices in Nigeria. This price surge comes at a time when the nation is grappling with high inflation rates and a depreciating currency. The impact on Nigerians, particularly the most vulnerable, cannot be overstated. Businesses are also feeling the pinch, leading to potential job losses and decreased economic activity.As the government justifies its decision based on long-term benefits, it is important to strike a balance between economic development and ensuring the welfare of the people. Implementing measures to alleviate the immediate burden on consumers and businesses will be crucial in navigating these challenging times.
Only time will tell how Nigeria's economy adjusts to these changes and whether the promised benefits will materialize. But for now, Nigeria is in serious economic dilemma and the hope of an average Nigerian is in serious tussle.
