President Bola Ahmed Tinubu has announced two major policy changes in his inaugural speech on Monday: the end of fuel subsidy and the unification of multiple exchange rates in Nigeria.
He said the fuel subsidy was no longer sustainable as it was taking a deep toll on the economy and that the funds would be redirected to public infrastructure, education, health care and jobs.
He also said the monetary policy structure would undergo “housecleaning” and that his administration would work towards harmonising Nigeria’s multiple exchange rates to attract more foreign investment and foster economic growth.
However, his pronouncements have triggered panic and confusion among Nigerians, who are already facing high inflation, unemployment and poverty.
In this explainer, we attempt to answer some of the questions that Nigerians may have about these policies and how they will affect their daily lives.
What is fuel subsidy?
Fuel subsidy is a form of government intervention to reduce the cost of petrol by giving direct financial support to oil companies, thus subsidising the product to consumers.
Nigeria is one of the largest crude oil producers in Africa with a minimum of 1.5 to 2 million barrels per day.
However, Nigeria is unable to refine enough crude to meet local demands, so it imports petroleum products, which are then sold at a government-set price below the international market price.
The government pays for the difference between the landing cost and the pump price of petrol, which is currently fixed at N230 per litre.
The subsidy is a huge drain on public finances. Last year, it cost the government N4.3 trillion ($9.3 billion) and for the first half of this year, N3.36 trillion was budgeted for it.
How will the removal of fuel subsidy affect Nigerians?
The removal of fuel subsidy means that petrol will be sold at market-determined prices, which will depend on factors such as global oil prices, exchange rates and transportation costs.
This will likely lead to an increase in the pump price of petrol, which will have ripple effects on other sectors of the economy such as transportation, food and services.
Many Nigerians are already feeling the impact of Tinubu’s announcement as long queues have returned to filling stations across the country, especially in Lagos and Abuja.
Some filling stations have hiked their prices to as high as N1,200 per litre in some states, while others have stopped selling altogether.
Many commuters have been stranded as transport fares have also increased. Some residents have resorted to panic buying and hoarding of petrol in jerry cans.
The government has assured Nigerians that there is no need for panic buying as there is enough supply of petrol in the country.
The government has also said that it will provide social interventions for vulnerable Nigerians who will be affected by the subsidy removal. The former administration had said that a loan of $800 million had been approved by the World Bank for this purpose.
What are the benefits of removing fuel subsidy?
The government has argued that removing fuel subsidy will free up resources for more productive investments in public infrastructure, education, health care and jobs that will improve the lives of millions of Nigerians.
The government has also said that removing fuel subsidy will curb corruption and inefficiency in the oil sector and reduce smuggling and diversion of petrol to neighbouring countries where prices are higher.
Some experts have also supported Tinubu’s decision, saying it is a bold and necessary step to reform the oil sector and align Nigeria with global best practices.
They have also said that removing fuel subsidy will encourage private investment in domestic refining capacity and reduce Nigeria’s dependence on imported petroleum products.
What are the challenges of removing fuel subsidy?
Removing fuel subsidy is not an easy task as it faces strong resistance from various interest groups such as oil marketers, transporters and consumers who benefit from the cheap petrol.
Removing fuel subsidy also poses social and political risks as it could trigger protests and unrest among Nigerians who see it as one of the few benefits they receive from the state.
The last attempt to remove fuel subsidy in 2012 led to nationwide protests and then President Goodluck Jonathan had to reverse his decision partially.
Tinubu will need to engage with relevant stakeholders such as labour unions, civil society groups and lawmakers to ensure a smooth transition and avoid a backlash from Nigerians who are already suffering from economic hardship.
Tinubu will also need to ensure that the social interventions promised by his administration are delivered effectively and transparently to cushion the impact of the subsidy removal on the poor and vulnerable.
What is the issue with multiple exchange rates?
Nigeria operates a multiple exchange rate regime, which means that there are different official and unofficial rates at which the naira is exchanged for foreign currencies such as the US dollar.
The Central Bank of Nigeria (CBN) manages the official exchange rate, which is used for government transactions and some priority sectors such as manufacturing and agriculture.
The CBN also operates other windows such as the Investors and Exporters (I&E) window, which is used by foreign investors and exporters, and the Bureau de Change (BDC) window, which is used by individuals and small businesses.
The unofficial or parallel market rate is determined by supply and demand forces and is usually higher than the official rate.
The CBN intervenes in the foreign exchange market by selling dollars to stabilise the naira and prevent it from depreciating too much.
However, this has depleted Nigeria’s foreign reserves, which stood at $34.8 billion as of May 2021, down from $38.5 billion in January 2021.
Why does Tinubu want to unify the exchange rates?
Tinubu said in his inaugural speech that he wants to unify the exchange rates to attract more foreign investment and foster economic growth.
He said the multiple exchange rate regime was creating distortions and inefficiencies in the economy and that his administration would work towards harmonising the exchange rates.
He also said that his administration would review the currency redesign policy that was hastily executed by the CBN, which introduced a new naira note with a different colour scheme and security features.
He said that his administration would treat both currencies as legal tender until further notice.
What are the advantages of unifying the exchange rates?
Unifying the exchange rates will enhance transparency and create a level playing field for businesses and investors who will have access to foreign exchange at a single market-determined rate.
Unifying the exchange rates will also simplify transactions and give a more accurate reflection of the true value of the naira.
Unifying the exchange rates will also aid economic policy making and planning as it will eliminate the need for multiple conversions and adjustments.
Unifying the exchange rates will also reduce the pressure on Nigeria’s foreign reserves as it will reduce the need for CBN intervention in the foreign exchange market.
Unifying the exchange rates will also encourage private investment in domestic production and export-oriented sectors as it will make Nigerian goods more competitive in the international market.
What are the challenges of unifying the exchange rates?
Unifying the exchange rates will not be an easy task as it will require careful planning, coordination and engagement with relevant stakeholders, including the CBN and the financial sector.
Unifying the exchange rates will also have some short-term costs such as an increase in inflation, which is already at 22.2 per cent as of April 2021, and a possible depreciation of the naira, which could affect Nigeria’s external debt servicing and import bills.
Unifying the exchange rates will also require addressing other economic challenges such as fiscal deficits, revenue shortfalls, low productivity, structural bottlenecks and insecurity that affect Nigeria’s economic performance and outlook.
