Can Nigeria sustain fuel subsidy amid higher oil prices?

Nigeria, a major oil-producing country, is currently facing a dilemma regarding its fuel subsidy program as global oil prices surge to near all-time highs. President Muhammadu Buhari recently explained the reason behind suspending the removal of the subsidy on petrol, citing global events and higher crude prices as contributing factors. Longji Darfur, a senior analyst at Financial Derivatives Company, delved into the challenges and possible outcomes of sustaining subsidies in the face of lower revenues, skyrocketing oil prices, and a shortfall in crude production. The debate revolves around whether Nigeria can continue to afford subsidy payments amidst the current economic climate. The situation presents a stark choice for African nations, balancing the need to maintain subsidies against the risk of market instability and political backlash. The diversion of oil flows by exporters from India and the Middle East to developing nations with unregulated markets has exacerbated supply shortages in Africa, leading to increased prices and scarcity. To address the supply issues and mitigate price hikes, policymakers have looked to the completion of the Dangote refinery as a potential solution. However, production declines and a lack of refining capacity on the continent continue to pose challenges, leaving Nigeria reliant on foreign imports. The current retail price of petrol in Nigeria stands at 180 Naira per litre, surpassing the regulated price of 165 Naira per litre due to rising operating costs and global price trends. The upward pressure on prices reflects the significant impact of subsidies, with an estimated 6 trillion Naira allocated for fuel subsidies this year, despite a nearly threefold increase in oil prices from $40 to current levels. The strain on fiscal resources is evident, prompting distributors to seek price adjustments and the government to explore external funding options. The subsidy burden extends beyond fiscal implications, affecting the entire supply chain and distorting market dynamics. Despite calls for subsidy reforms ahead of the upcoming elections, the government is unlikely to make drastic changes in the short term to avoid political fallout. The persistence of subsidies, while easing inflationary pressures on the population, underscores the government's challenge in balancing economic sustainability with social welfare. In the absence of a strategic solution to the subsidy conundrum, Nigeria faces mounting economic strains and a precarious path forward.