Cash-strapped Nigeria to keep fuel subsidies for another quarter - CNBC Africa

Cash-strapped Nigeria to keep fuel subsidies for another quarter

Western Africa


Nigeria will stick with costly fuel subsidies as corruption is a bigger issue. PHOTO: Reuters/Afolabi Sotunde

Nigeria will stick with costly fuel subsidies for now as new President Muhammadu Buhari says investigating corruption is a bigger priority than scrapping price caps on domestic fuel.

Buhari was advised by his transition committee to end the subsidy programme, which critics say is expensive, inefficient and open to abuse from corrupt operators.

Some say scrapping it is more pressing than ever, given a cash crunch that has forced the government to bail out state and local entities that could not cover debt payments and salaries.

But the country has issued a list of companies allowed to import under the scheme for the third quarter, with almost no changes to the firms or volumes of fuel involved, which will be just over 1.5 million tonnes of gasoline.

"I have received ... literature on the need to remove subsidies, but much of it has no depth," Buhari, who was elected in March, said in a statement.

Poor security, sabotage, vandalism, corruption and mismanagement - not necessarily subsidies - are the most serious problems of Nigeria's oil sector, he added.

Pan-African lender Ecobank estimates the cost of fuel subsidies for the coming quarter will exceed the 100 billion naira ($503 million) allocated for the full year, hitting 103 billion naira, based on oil prices near $57 a barrel.

The government also owes 159 billion naira in back payments to importers, which it promised last week to pay, meaning the continuation would require more money.

Buhari said he would "carefully review all the submissions he had received on the need to remove the subsidies".

Nigeria, Africa's largest oil producer, exports nearly 2 million barrels per day of crude oil, but relies almost entirely on imports for the 40 million litres per day of gasoline it consumes.

Some of those imports come via a programme to swap crude for oil products, which is the subject of a government corruption investigation.

The administration also aims to revamp the country's ailing refineries, which have been neglected for years and had not run at all for at least eight months, to provide at least 20 percent of its gasoline consumption.

But for now, it will keep compensating importers for the gap between market prices and the government-imposed price cap for gasoline and kerosene.

"It's too sensitive at the moment," one trader said. "There are institutions involved in the gasoline supply that, if they ceased, could create a vacuum that might create shortages in the near term."

Concerns over subsidy payments earlier this year caused fuel shortages that grounded flights, led to long queues at petrol stations and even brought mobile phone companies and banks to a standstill.

Traders and analysts say Nigeria cannot afford to keep the scheme going – particularly given the steep drop in oil prices on which the government relies for 70 percent of its budget.

According to the International Monetary Fund, the payments accounted for an average of 2.5 percent of Nigeria's gross domestic product from 2006-2012, and external audits have also revealed billions in "duplicate claims".

Dolapo Oni, head of energy research with Ecobank, said the move "shows it will take some time to make the changes" Buhari has discussed in the petroleum sector.

"It's not fiscally possible to continue the subsidies. It's not a question of if they will be removed. It is a question of when," Oni said.