Nigerian President Muhammadu Buhari’s sudden hessitance to remove fuel subsidies may be a pointer to internal divisions within his broad APC coalition, as to the direction of economic policy.
Investors had hoped that the new government’s quick movement on ending the regressive and corruption laden subsidies would be a signal of their intention to pursue structural reforms that have crimped growth in Africa’s largest economy.
President Muhammadu Buhari had said in April, (when still president-elect) that he would end fuel subsidies and the oil and gas sector would be reformed as a matter of priority in order to attract new investments.
Unveiling his economic policies at a Lagos Business School breakfast meeting, he added that he would run a very lean government, which would involve rationalising overlapping and redundant ministries, departments and agencies (MDAs) in line with the Steve Oronsaye presidential committee report.
Buhari, who was represented by former Ekiti State Governor, Kayode Fayemi, at the meeting however disclosed that there would be very little action from his administration until October, partly due to what he ascribed to the fact that President Goodluck Jonathan is the author of the 2015 budget.
Instead, the payments which are eating deep into the fiscal earnings of the cash strapped Federal and State governments may continue for some time.
“Policy differences between the commercially – minded southwest and the northern parts of the party may lead to policy volatility,” said Control Risks, a global business risk consultancy, in a June 25 presentation.
This may impact on the Buhari government’s grip on policy making and legislative agenda, according to the firm.
Documents seen by BusinessDay, linked to the input by the Oil and Gas sub-committee of the President’s transition committee, outlined steps for the government to take in the first 100 days, including removing subsidies on petrol and kerosene.
The committee concluded that:
“Stopping subsidy will release money for the development and facilitate the rebuilding of a healthy home-grown downstream sector.”
However Buhari was quoted by Garba Shehu, the president’s Senior Special Assistant, Media and Publicity, as saying,
“I have received much literature on the need to remove subsidies, but much of it has no depth.”
This was after the president received a briefing from the Ministry of Petroleum Resources, Nigerian National Petroleum Corporation (NNPC) and other agencies in the oil sector.
The fuel subsidies are a huge burden for the Nigerian authorities to bear.
They accounted for an average of 2.5 percent of Nigeria’s gross domestic product (GDP) each year, between 2006 and 2012 according to the International Monetary Fund (IMF).
The government set aside N914 billion ($4.6 billion) for it in 2014.
Removing the subsidies may help moderate demand for dollars by fuel marketers by reducing the bogus import bill by 15-20% and stabilise the foreign exchange market, said Bismarck Rewane, CEO of consulting firm, Financial Derivatives.
Investors have sold or shunned naira assets on the back of the Central Bank’s decision to maintain its expensive dollar peg at N199 to the greenback, although the rate had collapsed to N240 per dollar on the parallel or black market.
“Onshore market sentiment seems to have turned less constructive in recent days, as illustrated by the pick-up in bond yields. This reflects concerns about the exchange rate outlook and the wider USD-NGN parallel market rate, and the realisation that foreign inflows may take time to materialise if the FX regime is not adjusted soon,” said Samir Gadio, Head of Africa Strategy and FICC Research at Standard Chartered Bank in a response to questions.
The naira which has lost some 18 percent of its value in the past year, is falling mostly because Nigeria gets 95 percent of its dollar earnings and 70 percent of the Federal budget from the sale of one commodity, oil.
The transition to a new government has led to short-term operational issues, according to Control Risks.
“More broadly, economic uncertainty is an issue of oil price, government finances, salary arrears, currency and non-payment,” Control Risks said.
“Internal dynamics of the newly ruling APC is playing out. President Buhari will need to manage relations with APC powerbrokers.”
PATRICK ATUANYA
