Energy Fact & Opinion: Nigerian Gasoline Subsidy Reform
January 21, 2016
Facts:
- On January 1, Nigeria’s Petroleum Products Pricing and Regulatory Agency (PPPRA) announced that it would remove gasoline subsidies, while simultaneously cutting the price of gasoline from 87 naira per liter to 86.5 naira per liter and changing the mechanism by which gasoline prices are set.
- Though this change has been construed as a form of deregulation that would allow gasoline prices to follow market fluctuations, for now the government appears to remain in control of gasoline pricing.
- Under what has been described as “price modulation,” the PPPRA will now set a minimum price for gasoline and allow marketers to sell above those prices. This replaces the previous system, in which the PPPRA estimated a market price for gasoline, fixed a lower price for domestic sale, and paid subsidies to marketers for the difference.
- Gasoline subsidies cost Nigeria 2.2 percent of GDP in 2012, or roughly $10.5 billion, but their value has fallen greatly following the drop in global oil prices in mid-2014.
- The removal of gasoline subsidies is seen as part of a suite of energy sector reform efforts being undertaken by the government of Muhammadu Buhari. These reforms enjoy the encouragement of the IMF, which has recommended cutting fossil fuel subsidies while making public spending more efficient.
- Yet Nigeria does not appear to be creating a system to deliver subsidy savings to the public. The SURE-P subsidy reinvestment program, created by former President Goodluck Jonathan to reroute fuel subsidy funds into development activities, was not included in budget planning for 2016-2018 following investigations into the program’s alleged misuse of funds.
Opinion:
Nigeria appears set to remove gasoline subsidies, which once cost the country’s finances dearly and which have remained a political flashpoint since former President Goodluck Jonathan’s attempt to remove them was stymied by popular protests in 2012. Though opponents of fossil fuel subsidy reform such as the Nigeria Labor Congress are likely to protest the government’s most recent action, the tactic of lowering prices while removing subsidies may inhibit popular mobilization. Even if the change takes effect with minimal protest, it is not clear that this change signals a longer-term adherence to market based gasoline pricing. In the longer term, the PPPRA’s continued control over the price of gasoline means that the government can still manage price increases for political reasons. Politicians could therefore succumb to political pressure to prevent prices from rising when the market recovers. Moreover, poor Nigerians may have strong incentives to protest future price increases. Although fossil fuel subsidies are regressive and inefficient in improving the livelihoods of the poor, their removal hurts the poorest the most, and President Buhari’s government has not yet proposed an alternative system to deliver subsidy savings to Nigeria’s neediest.
