- Deloitte report suggests that removing fuel subsidies in Nigeria could have negative short-term effects but substantial long-term benefits for the economy.
- Smuggling and consumption: A significant portion of fuel is smuggled across borders, taking advantage of weak exchange rates.
- Short-term effects include inflation rise, rationing of resources, increased poverty and crime rates, and potential negative impact on GDP. However, in the long term, redirecting saved funds to capital expenditure could boost productivity and lead to economic growth.
Global audit, consulting, and financial advisory firm Deloitte revealed that while the immediate impact of removing fuel subsidies in Nigeria may be negative, the long-term benefits for the economy could be substantial.
In its report viewed by Nairametrics titled “Short-term pain, long-term gain,” Deloitte emphasizes that redirecting the saved funds from subsidies towards capital expenditure rather than recurrent expenditure, such as wages and salaries, could lead to significant economic growth.
The report’s findings shed light on the potential trade-offs and strategic considerations associated with fuel subsidy removal in Nigeria.
Smuggling and Consumption
They noted that various figures have been bandied on the level of fuel consumption in Nigeria, citing that in reality, the effective demand for petrol is estimated at around 60mn litres per day; and the rest is smuggled across the border to neighbouring countries (e.g. Benin Republic, Cameroon, Ghana) where arbitrageurs take advantage of the porous borders and weak domestic exchange rate.
Short-term effects
Inflation to rise further in subsequent months: They noted that the new price of petrol is more than a 150% increase, implying that consumer prices will rise further.
- “Transporters were the first to respond to the price increase, raising their fares by at least 100%. Transport costs account for about 6% of the consumer basket15 but the spillover effect is sharply higher.
- “For instance, even though the bulk of food transportation across the country is via diesel-fired trucks, food prices are expected to skyrocket with the increase in petrol prices.
- “Inflation numbers for June will be sharply higher. Nigeria currently has an inflation rate of 22.22% as of April 2023. Higher fuel and energy costs coupled with the ongoing planting season will be inflation triggers in the next couple of months. This suggests that the tightening stance of the CBN may be here to stay for a little while longer.”
Rationing and reallocation of scarce resources amid numerous wants: Deloitte added High transport fares infer that less is spent on other consumer goods, adding:
- “ The rational consumer is then forced to make the difficult choice between luxuries and necessities, between the numerous wants amidst a static income.
Poverty rate up, crime rate up in the short-term: Deloitte says it expects more Nigeria to fall below the global poverty line of USD 2.15 per day in the short term.
- “This could lead to a further increase in the crime rate as Nigerians struggle to make ends meet. Nigeria currently has a multidimensional poverty rate of 63% and a multidimensional poverty index of 0.257,16 one of the highest in SSA and West Africa.
GDP Impact and consumer spending impact
They added Gross Domestic Product (GDP) may be affected negatively in the short term, due to an increase in consumer prices and the resultant erosion in consumer purchasing power.
- “A further decline in consumer demand will affect sales and lead to a reduction in production and inventory levels.
- “This will ultimately affect aggregate output. While the real economy and the large informal sector will be directly affected by the removal of fuel subsidies as these are major consumers of petrol, the services sector and industries (e.g. manufacturing) that use diesel and gas plants will be impacted indirectly.”
They also noted that Labour productivity could be affected due to the increased hardships that will be faced by Nigerians, citing that the hybrid work mode adopted by most organizations following the COVID-19 pandemic is likely to intensify as a means to address the welfare impact of the subsidy removal.
Long term
Deloitte forecasts that in the medium to long term, the Nigerian economy stands to benefit, especially if the money saved is spent on capital expenditure rather than recurrent expenditure such as wages and salaries.
- “Investment in capital projects has the multiplier effect of boosting productivity and ultimately output. An increase in the supply of goods will ultimately lead to a decline in prices and inflation in the long term.”
What you should know
Following the announcement of the subsidy removal, the Nigerian government commenced negotiations with the trade unions (TUC, NLC), who have requested an increase of Nigeria’s minimum wage from N30,000 to N200,000 a month to deal with the effects of the removal, which has seen retail energy prices rise 150%.