The move is a direct result of the drop in crude oil price and consequently gasoline price in the international market.
(READ MORE: Oil prices slash Nigeria 2015 GDP growth)
“While opinions may differ on the delay and magnitude of the reduction, we believe the move comes at a time when international price of gasoline has dropped to a level where there is low government subsidy expenditure on pump prices,” said Ecobank’s Middle Africa Speed Note.
“On the magnitude of the reduction, we believe the announced price is a reflection of a sustainable price for the country at current international price of gasoline.”
The report further stated that, although the international price of gasoline (including freight) as at the day of the announcement was 74.35 naira per litre, the addition of 15.49 naira justifies the new pump price, albeit with a subsidy component of 2.89 naira.
“Although the landing cost in Nigeria as estimated by the PPPRA is 74.35 naira per litre, other sourcing location such as the US gulf coast offer significantly lower landing cost,” added the report.
The report added that, the reduction in pump prices will reduce the cost of most household items especially food due to the high correlation with the price of Petroleum Motor Spirit (PMS).
“Therefore we expect a slight decline in food prices across the country as retailers factor in the reduced cost of transportation,” added the report.
“The move also comes at a time when inflation is becoming a concern to regulators due to increase in spending as election approaches.”
According to the report reduction in food prices will translate to lower inflation figure due the fact that over 40 per cent of the CPI basket comprises of food items.
“Furthermore, the decision to reduce the price could potentially attract higher subsidies due to the volatility in oil prices.”