Nigeria: Will long-awaited structural reforms be brought to a good end?

Event

Under the leadership of newly elected President Tinubu, Nigeria could take some historic turns to counter some important structural weaknesses. During his inauguration in the end of May, Tinubu announced fuel subsidies would be removed as of 1 July. At the same time, in May 2023, the Dangote refinery opened and should become fully active in June, when it is expected to process its first Nigerian crude oil shipment. With an estimated capacity of 650,000 barrels per day (bpd), this refinery alone could be – in theory – large enough to fill all of Nigeria’s refined fuel needs. However, it will take some time to raise its capacity, especially as technical failure continues to be a concern. In fact, the IMF expects a rather slow production path from 100,000 bpd in 2024 to 300,000 bpd by 2027. Moreover, the transportation of refined fuel across the country is another great concern, knowing that pipeline infrastructure is very vulnerable in Nigeria.

Impact

Africa’s largest crude oil producer has been struggling with a painful lack of refinery capacity for decades, resulting in a huge fuel import bill and a harmful fuel subsidy scheme. These subsidies led to graft and corruption and absorbed enormous parts of the government budget (15% of public spending or 2.2% of GDP in 2022). Although the cutting of fuel subsidies could be highly profitable in terms of fiscal efficiency and righteous public spending, the immediate welfare impact must be mitigated by matching it with social programmes in order to be successful in the longer term. President Tinubu’s announcement of the fuel subsidy cut, caused an immediate tripling of fuel retail prices across the country, raising unrest over the impact on the poor. It remains to be seen how and if this fiscal shift will be successfully implemented.

The Dangote refinery should lower refined fuel import costs, bringing relief to the external and fiscal accounts and lowering pressure on foreign exchange reserves. Although expensive imports will be domestically substituted, the final positive impact is expected to be limited. Lower revenues from crude exports will partly counter savings, as the refinery will purchase its crude input locally. General economic growth should nevertheless pick up to 3.2% in 2023 thanks to a recovery in crude oil production, after reaching historical lows in 2020-2021, while non-oil growth should be supported by moderating headline inflation from 21% in 2022 to an expected 18% in 2023. As foreign exchange reserves continue to be under pressure, falling from a peak of USD 41 billion in 2021 to USD 35 billion in May 2023 (4.5 months of imports), the Nigerian government is under great pressure to act on its liquidity weaknesses caused by high import expenditure, weak investment inflows (lack of confidence partly due to security risks) and a complex multiple exchange system. Capital controls, import restrictions and rationed availability of hard currency in the market are expected to stay on at least in the near term. The long-awaited Petroleum Industry Act passed in 2021 did not yet provide a sound framework to attract new investments, as the oil sector continues to be held back by production disruption, corruption, mismanagement, environmental risks and theft. Non-oil private sector investments (manufacturing, food processing, (port) infrastructure) have been much more resilient in recent years and are expected to continue to be so in the light of global decarbonisation.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com