"Fuel subsidy is gone!", Bola Ahmed Tinubu, Nigeria's new president declared during his inaugural speech on Monday. His words were aimed at re-echoing the already existing actions of the administration of his predecessor Muhammadu Buhari who had already said that the payment of subsidy on Premium Motor Spirit (PMS) will end this month, according to the Petroleum Industry Act.
Although the fuel subsidy cut is meant to start July 1, Tinubu's declaration has led high PMS prices and long queues nationwide due to panic buying. From the official pump price of ₦185, PMS is now selling between ₦350 and ₦550.
However, the Nigerian National Petroleum Company (NNPC) has welcomed the removal of the subsidy. "The reality is that from today the government can no longer afford to pay for fuel subsidies as a nation," says Mele Kyari, the NNPC chief executive. According to the fuel regulatory agency, it is spending ₦400 billion ($867 million) monthly on subsidising the pump price in the country.
Kyari said that NNPC was owed ₦2.8 trillion($6.1 billion) in outstanding subsidy payments by the government. The subsidy is funded by debt, according to Nigeria's finance minister.
Meanwhile, local labour unions and civil society organisations have protested the removal. "You can not remove subsidy without offering to reduce the waste in government. You can not be living large while the citizens bear the higher cost of living," Oluseun Onigbinde, global director of BudgIT, a Nigerian civictech startup, tweeted. "Subsidy removal must happen but it requires tact. You have to figure out how to handle food inflation, provide alternative means of transport and ramp up social investment under a well-structured social investment program. Anything else is a pathway to social disorder."
The increased cost of fuel due to the subsidy has led to high transport fare, hike in food prices amongst others. For instance, logistics and mobility companies like Bolt and Uber have since reviewed their prices. "Cost of fuel remains in our top two drivers of operating expenses, so we have watched the progression of the fuel subsidy conversation," Emeka Mba-Kalu, the CEO of Sendstack, a Lagos-based logistics startup, said.
A profitable exit for investors?
For the Nigerian capital market which recorded its biggest growth in the value of investments this year following Tinubu's promise to curb multiple taxations and other investment constraints, global market expert Joshua Ishola says "the financial markets seem to be obsessed with getting rid of subsidies so any news in that direction would be received with enthusiasm by investors".
"The elephant in the room remains access to FX (or assurance of FX for exits), so foreign investors are currently investing in Nigeria by proxy through the Eurobond markets—I preempted this and bought a few corporate and sovereign bonds that have realized capital gains in recent days. This play on corporate Eurobond is still available as the yield on the corporate bonds is higher than the dividend yield of the same corporate in Naira," he added.
Ishola also said that the subsidy removal will positively impact petroleum product trade. According to him, the PMS market free to forces of demand and supply. "As an investor it removes the govt red-tape and corruption perpetuated by NNPC that has plagued the system and benefited the connected minorities. All this means more investors on the back of a clear market driven path to a profitable exit," Ishola said.