Nigeria’s daily fuel imports are down 45 percent this year, or by 27 million litres a day, on the back of the partial removal of petroleum subsidies by the Federal Government.
The amount of fuel imported into the country is running at a rate of 32 million litres a day, down from 59 million litres a day, before the 49.2 percent hike in fuel prices, from N67/ litre to N97/litre, and this is having a positive effect on the value of the naira, as well as the foreign exchange (FX) reserves.
“Over the period of many weeks, the naira exchange rate has firmed on the back of a sharp fall in imports of petroleum products,” said FBN capital analysts, in a research note released yesterday.
“A reduction in the subsidy does not reduce the total cost of the import but does reallocate the split between the consumer and the provider of the subsidy. A reduction in the volume of imports, by contrast has a positive impact on FX demand and on the public finances.”, the note said.
The naira has been relatively stable at the N157 to the dollar level for most of the year, and has advanced 3.2 percent this year, versus the dollar. Nigeria’s FX reserves rose to $37.3 billion, a 21-month high, last week, after ending 2011 flat on the year. The reserves are up 13.3 percent year-to-date.
FBN capital says the cut in the subsidy on premium motor spirit (PMS) in January has led to a number of changes in the market and in market practice. The Petroleum Products Pricing Regulatory Agency (PPPRA) has introduced changes in the import regime, such as the appointment of certified cargo inspectors and the launch of a new inspection system, which has helped to cut the number of companies benefitting from the subsidy scheme to 42 from 128 last year. The changes have brought about “striking progress” according to sources at the Presidency, helping to curb fraudulent imports.
In a debate in the National Assembly in February, it emerged that imports had been running last year at 59 million litres while consumption was estimated at 35 million litres. A detailed report by the House of Representatives ad-hoc committee on fuel subsidy recently alleged fraud totaling the equivalent of N1.07 trillion (about $ 6.8billion). Payments totaling N2.6 trillion ($16 billion) in fuel subsidies were made in 2011 through a fraudulent process, the committee said.
“Nigeria consumes about 35million litres of petrol a day. If we assume that all of the petrol consumed in Nigeria is imported and by implication subsidised, then the government should be spending about N1.1 trillion ($7 billion) on petrol subsidies per annum, instead, the government is estimated to have spent more than double that, up to $16billion, on petrol subsidies in 2011.” Yvonne Mhango, Renaissance Capital Sub-Saharan Africa, economist, wrote in a recent research note.
The Central Bank of Nigeria’s (CBN) Monetary Policy Committee, (MPC) met this week, and referred to the “reduction in arbitrage opportunities” in the industry, as a result of the partial removal of the fuel subsidy. CBN Governor, Sanusi Lamido Sanusi, in a statement made after the MPC meeting hinted at the need for structural reforms to take place in the Nigerian economy, including perhaps a total phase out of the subsidy.
“Our view on fuel subsidy has always been very clear: that we cannot spend 4 percent of our Gross Domestic Product (GDP) on petroleum subsidies. There are of course other issues. These incude issues around the transparency of the entire process, which have come into light, and which are being investigated,” he said.
President Goodluck Jonathan this week submitted a report on the $6.8 billion fuel subsidy fraud to the Economic and Financial Crimes Commission (EFCC) for investigation and possible prosecution of oil company officials behind the scam.
The real solution though, would be to move to full price deregulation, according to FBN capital, “This would yield substantial fiscal savings, attract investment in refining, remove the need of the PPPRA and several other public bodies, and in time, improve supplies across the country.”