The Economic Effects of Recent Removal of Petroleum Subsidy In Nigeria.

The Economic Effects of Recent Removal of Petroleum Subsidy In Nigeria.


The recent increases in gas/petrol prices will dampened economic growth in Nigeria.


13 January, 2012

The Federal Government of Nigeria on January 1st ceased to subsidise petroleum In Nigeria, for decades Nigerians have enjoyed low gasoline prices, Now that this benefit has ended, what are the economical implication other that the popular planed protest by various groups such as labour, #occupynigeria and #fuelsubsidy, on the nation?

The economical effects, without auguring for or against subsidy removal, is what this paper will try to capture. The Government of Nigeria would have to consider this effects now or deal with it In the near future.

The growth of real (inflation-adjusted) GDP will reduce if the price of petrol is to stay as is. In addition, the rise in petrol price and the certainty of uneven prices across all 36 states of the federation, will add anywhere from 3 to 5 percentage points to consumer price inflation for 2012.

Households’ income and spending will both be affected by the rise in petrol prices. The value of minimum wage compensation will depreciate further ( assuming it is finally at N18,000) combined with the increase in inflation. At the same time, the average household’s annual spending on energy goods and services will rise by about N75,000, and their saving rate dropped sharply.

The fall in the saving rate, will erode about half of Nigeria's present middle-class citizens and further dampen the negative effects that higher prices would ordinarily have had on the economy in the short run. Consumer spending will be diminished greatly over the next few years, as citizens try to adjust and build up new savings.

Business must pay attention to energy efficiency and create an active corporate energy strategy

Corporations and non-energy producing firms are not left-out and will be indirectly affected by the energy price hike, affecting their bottom line. It is well documented that the Nigerian power industry barely supports 20 percent of the Nations needs; Corporations in turn will push their losses on consumers. On the other hand, the profits of energy producing companies will increased sharply. Most energy using industries will be able to pass on the higher costs of energy to their customers as its seen on the streets of Nigeria today.

GDP is expected to largely rebound from its short-term losses since majority of Nigeria's revenue is from the sale of oil, although the shift in oil prices is likely to keep the level of GDP over the next 5 years lower than it would have been otherwise. In addition, Nigerian standard of living will be depressed to a greater extent than will GDP.

Now that the subsidy is gone, one would wonder if the fluctuations of the price of crude oil globally will affect the price of petrol at the local filling stations.

Many people believe that the increase in petrol prices will lead to sharp slowdowns, in economic growth and the risk for small businesses would be at historical highs.

The global economy and most important the Nigerian economy has been at very weak points in their business cycle for the past three years, following the banking crises in Nigeria which is yet to be fully resolved. The central bank struggles throughout this period to control inflation and spending billions of dollars trying to defend the Naira, is a indicator of the general health of the economy. Nigeria's economic structure at this time is not able to respond to price shocks of over 100 percent increase today.


The Short-Term Impact of subsidy removal.

Paying high prices for petrol and using less of it will affect the demand for goods and services. Nigeria is known more as a consuming nation than a producing nation. The few production industries In Nigeria will face a daunting challenge to stay in business (cost of production will go up and demand will drop).

The effects on demand, however, have by far the greater potential impact on GDP in the short run. In a perfect world, using less energy has only a small direct effect on production because, out of all the inputs to production (labor, structures and equipment, energy, and other raw materials), energy costs account for a relatively small share of output, but In the case of Nigeria, energy is a major share of output, as organizations have to provide for their own power in-house, such as generators sets etc and are exposed to the market as it relates to energy prices with the subsidy gone.

The effects on demand and the consequent indirect effects on production—could be a much bigger problem, because spending more on petroleum imports and the nations poor power sector will generally reduces spending on goods and services in Nigeria while it will increase prices on virtually every good and service.

A good question that would requires government explanation, “Is the subsidy removal going to affect just petrol at the stations or petroleum products altogether ? Such as jet fuel, diesel, asphalt, tar, lubricants, chemical processes to produce plastics etc

The rise in energy prices will slow the growth of real household income significantly. Despite those potentially large effects, demand for basic goods and services will hold up well in the coming years.


Estimated Effects on Inflation and GDP

Although it is difficult to determine exactly how the economy would fare if prices stay the same. Here are some basic economical predictions

The higher prices that consumers pay for petrol will not only add about one or two percentage points to the inflation rate in a calender year but also affect non petroleum consumer prices. The extent of that effect is uncertain, but petroleum prices today appear to have doubled, this will indicate that we should expect a huge jump in percentage points.

Nigeria is already dealing with about 11 percent inflation, coupled with its huge dependence on cash transactions and monetary policies that have been implemented to reduce volume of cash transactions. The economical structures may not be able to deal with its effects right now.


Effects on Nigerian Households

The cost of energy would be one of the greatest sources of financial hardship for many Nigerian families moving forward. An increase in petrol prices will affect households income, spending, and saving rates. The strain on households and businesses trying to cope with fluctuating prices at the pump or debt incurred in the course of trying to power  their  homes would reach new highs in already depressing conditions.

Household still struggling to adjust to the credit squeeze by the financial system for the past three years, will now suffer little to no growth in income in the next 2 to 3 years. These slower growth reflects the direct effect of higher petrol prices on consumer price inflation as well as a slowdown in the growth of the economy overall. Consumer price inflation will increase as the growth of wages is fixed, this will lead to a technical deprecation of the Naira.

Consumer prices will be at high risk for manipulations as a result of fluctuations with the forces of supply and demand.

Households will spend much more on goods and services. The savings of $8 billion by the Government of Nigeria, will be transferred to every household. That implies that annual petrol spending per household will rise by an average of about $950 over that period. The increase in the price of petrol relative to the prices of other goods and services will also caused a rapid rise in the ratio of petroleum spending to disposable income, households are likely to reduce their petroleum consumption in the future, which will have an effect on economical activities.

Plan Investments On Subsidy Savings

It is not really clear, what the government plans on doing with over N8 billion subsidy savings annually, without credible facts, it would be difficult to analyse what effects it would have on the economy in the future.

We therefore can only suggest a few avenues, where the government can channel subsidy investments, for the short and long term.

The bulk of the savings, need to be reinvested in the refineries, with a 2 year time frame to get new and old refineries to meet the demands of not only Nigeria but the whole of West Africa. Anything short of this will be devastating to the Nigeria economy for years to come.

The governments would have to invest in main street Nigeria, they would need to come up with various ways to help small business and general population through the financial sector with loans and tax-breaks.

By putting this money saved back into the Nigerian economy in a controlled way, it will go a long way to control Inflation, increase investments and encourage individuals to file taxes to get what ever-benefit entitled to them.

Investments in the infrastructure of the power sector would be another long term goal, not just spending to generate power, but investments in the infrastructures that will distribute generated power to rural and urban areas across the nation. this will include construction of power towers, laying of cables, distribution points, transformers and so on.

The government could also look into telecommunication subsidies, for majority of citizens below the poverty line. This will go along way in relieving hardship, boosting productivity and putting money in the hands of those who need it the most.

In conclusion, the is no quick fix to the effects of subsidy removal to the Nigerian economy, one would only hope that the Government of Nigeria would use it powers to implement economical policies that will act to absorb the devastating effects, the biggest losers from poor planing and proper implementation would be the national economy.




The Federal Governments greatest worry should not be the current strike actions of civil societies in Nigeria, If they believe in moving forward with effected petroleum subsidy removals, they need to pay attention to the effects of inflation and manipulations on consumer prices, currency deprecation, the effects of CBN monitory polices, introduction of cashless systems High unemployment and insecurity, a combination will have a potent punch and potential to bring the economy to a grinding halt, forcing Nigeria into a depression.

This article was written by Seven Ezumba of Reinvent Rebuild Group. If you have any questions or would like to continue the discussion in more detail, feel free to contact Seven at seven@reiventrebuild.com.

 

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