Monday, March 14, 2022  / 03:37 PM / by CardinalStone Research / Header Image Credit: Industry Leaders Magazine

Russia's military action on Ukraine and associated sanctions have sent commodity prices soaring, with Brent crude oil price reaching $139.9/bbl, the highest level since July 2008. Historically, rising crude oil price is usually a bittersweet pie for Nigeria, as an expensive PMS subsidy regime offsets passthroughs to FGN's revenue.

Initially, the government planned to halt PMS subsidies in H2'22, providing only N443.0 billion in the 2022 budget. But this plan was later upturned, possibly due to fear of potential backlash in a pre-election year. The government was forced to float a supplementary budget of N2.6 trillion to cater to the expected associated expense.

Holding other variables constant, we estimate that a crude oil price of $100.0/ bbl could translate to a subsidy payment of N3.6 trillion, which is notably higher than the N3.0 trillion earmarked for 2022 (see figure 1). This exercise has also resulted in a revision of our 2022 fiscal deficit estimate to N10.7 trillion (5.8% of GDP) from N10.1 trillion previously (See figure 2).

From a fiscal standpoint, the net impact of elevated crude oil price is biased to the downside, with limited pass-through to the federation account. For context, while the rebound in crude oil price resulted in a 30.9% YoY increase in Nigeria's gross revenue in 2021, the net amount available for oil and gas revenues transferred to the Federation Account by the NNPC contracted by 51.0% due to expensive subsidy payments (see figure 3).

Higher energy cost to amplify inflation risk

At our base case crude oil price of $100.0/bbl, if the federal government fails to make additional subsidy provisions and chooses to pass on the cost in excess of N3.0 trillion (budgeted subsidy for 2022) to consumers, we expect a 19.2% increase in PMS price to N174.0/litre. This hike could add about c.95bps pressure on core inflation by our estimate.

In the short term, we think that inflation will likely tick up due to a prolonged period of fuel scarcity and elevated prices of AGO & aviation fuels. Specifically, the global jet fuel touched a 14-year high, resulting in about 80.0% to 100.0% increase in airline fees. We expect the higher aviation fuels coupled with the 170.0% YoY surge in AGO (diesel) price to N650.0/litre to pressure the core inflation, with a negative pass-through effect on the food basket due to higher logistics costs.