Nigeria: Why not a market solution to fuel problems? Fuel supply is a politically sensitive issue in Nigeria, and with elections a year away, the need for a solution to the problems of assuring a steady supply and avoiding subsidies is growing more acute.

Author:Raji, Rafiq

Nigerians had a rude shock at Christmas. Fuel, hitherto abundant, suddenly became scarce. President Muhammadu Buhari blamed saboteurs, in a veiled reference to opponents eyeing the presidency in 2019. While he did not say who they were, there is a consensus, in the top echelons of the government at least, that the shortages were contrived.

Controversy has always trailed the politically sensitive issue of fuel supply in Nigeria. Once a subsidised commodity, it was one of the few benefits citizens received from the government. Verner Ayukegba, principal analyst for sub-Saharan Africa at London-based IHS Markit, suggests why the Buhari administration is reluctant to raise fuel prices in tandem with crude oil price movements: "It is one of the few ways in which the government can reach a broad set of Nigerians, especially the struggling masses, with subventions."

John Ashbourne, Africa economist at London-based Capital Economics says: "Raising fuel prices is obviously always quite painful--both economically and politically. The government might be hesitant to raise prices now, given that the economic recovery is still fragile and inflation has only just started to come down."

But there is a greater fear for the government should it choose to increase fuel prices at this time: "The potential fallout is negative public opinion against the government in the run-up to the next elections," says Ayukegba. The government could mitigate this by targeted grants to lower-income groups, but such programmes do not have a great history of success in Nigeria.

There are other ways the government could keep the current fuel price of 145 naira per litre ($0.40) unchanged without paying a subsidy to marketers, or at least prevent a steep price hike in the event it decides to be bold. As Ashbourne puts it: "In the short run, the government could reduce landing fees and taxes on importers and hope they pass on the savings."

This is one of three strategies the government is considering, Ibe Kachikwu, the minister of state for petroleum resources, told a joint Senate and House of Representatives committee on downstream oil in January. He also suggested that foreign exchange could be made available to fuel marketers at a rate that makes up for any difference between the landing cost and retail price.

A further possibility would be a multiple pricing regime whereby marketers would be able to import fuel and sell at any price that suits them while the state oil company...

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