Thursday, February 25, 2021 /09:40 AM / By United Capital Research / Header Image Credit: Business Traffic

In 2020, the COVID-19-inducedeconomic shock led the FGN to adopt structural changes and move away fromsubsiding energy products. The government moved towards price modulation forPMS, removing subsidy provisions in the MTEF (2020-2023). It also announced itsplans to fully adopt cost-reflective electricity tariffs by 2021, following apartial adoption in 2020.

Reception from stakeholders tothis policy was mixed, primarily due to doubts regarding the government'sability to retain its policy when market fundamentals improved as energy priceshave long been subject to politicking in Nigeria.

Oil prices have risen above $65/bwith the landing cost of PMS estimated at N186/l in the media. However, pumpprices remain at N162/l, highlighting some form of subsidy by the NNPC. In Q42020, following the call for price adjustments by marketers, organized labourbegan to advocate for the welfare of its members, highlighting the potentialeconomic impact and threatening strike action.

The FGN responded by setting up atechnical committee that constituted the NNPC, organized labour, the PPPRA, andother relevant government ministries. Following the technical committee'sreport, state governments and the FGN will hold a final vote on Thursday(25/02/2021) to decide on price adjustments.

At Thursday's vote, we suspectthe government will be wary of the potential short-term effect of subsidyremovals, amid rising inflation and overall pressure on consumption spending.In these challenging times, subsidizing consumption of petrol have theireconomic and social benefits, and rightly so.

However, there lies a counter-argumentthat temporary pain from their removal could potentially lead to a long-termgain. Thus, the government may be better off in a number of ways by biting thebullet now.

Firstly, it challengesSub-national governments and the FGN to adopt tough measures to grow the incomeper capita of its citizens to cushion the impact of higher energy prices.

Secondly, it opens up theindustry to increased investment.

Finally, it frees up funding fordevelopmental projects that could potentially accelerate economic growth in thelong-run. 

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