Fitch Ratings on Tuesday said that the partial removal of fuel subsidy in Nigeria in January will likely result in extra resources of about N150 billion for distribution among the Nigerian state governments.
According to Fitch’s calculations, the lower deductions at source will result in an increase for states of about 5%-10% of their oil-related revenues.
Despite the higher proceeds, growing staff costs following the phase in of the N18, 000 monthly minimum wage, in tandem with rising energy costs will most likely offset this benefit. Therefore, in Fitch’s opinion, the extra resources are likely to be spent on growing operating costs, unlike the national governments’ share, which is ring-fenced for capital projects such as power and roads.
As higher revenues are not likely to translate into stronger budgetary performances, the agency said it expects the five Nigerian states it rates to continue to perform in line with its expectations.
Nigeria is expected to award fresh allocations for the importation of petrol in March, trade sources said, despite the ongoping House of Representative investigation into abuse of the fuel subsidy .
Nigeria currently relies on exchanges of crude oil for gasoline and other products as no new tenders have been allocated since the government’s attempt to remove the fuel subsidy in January. Now traders’ hopes are rising that a fresh allocation is imminent.
“We hear that the PPPRA (Petroleum Products Pricing Regulatory Agency) will award some import allocations in March with the new funds made available in the budget, but it will be restricting the number of companies, and there will be closer monitoring of how the volumes are allotted and filled,” a West African-focused gasoline trader said.
“Maybe we will see some second-quarter allocations but the whole subsidy wrangle won’t be resolved quickly. Certainly nothing is expected to be resolved before April,” said a petrol broker.
The petrol market has been awaiting clarity from the federal government on how the new regime will work since it attempted to remove petrol import subsidies on January 1.
There was more than a week of mass protests against the ensuing sharp rise in fuel costs and the government then partially reinstated subsidies.
As a result of the reinstatement, Nigeria had to revise upwards its outlook for the budget deficit this year, with the subsidy expected to soak up N888 billion of the 2012 budget.
The federal government will be giving up N309 billion for the subsidies, while the rest will be taken out of spending for state and local government.
“Some funds were found to cover the shortfall, which gives suppliers some security,” a trader said.
The House of Representative is currently investigating abuse of the subsidy system, after uncovering a $4 billion discrepancy between the subsidy paid to importers and the amount of gasoline brought into the country.
Traders said that companies participating in the PPPRA system had been asked to supply documents to prove that they had delivered the product against the amount of subsidy paid.
Nigeria is the largest market for petrol in West Africa, with consumption estimated at some 20-25 million litres a day.
A major restructuring of the whole process is anticipated but it is not clear whether the market will be fully deregulated by April as initially envisaged.
Instead, an allocation will be made through the PPPRA to meet the country’s gasoline requirements.
“The keystone companies will be awarded larger volumes and the smaller ones will get a bit less,” a trader suggested. “I expect the smaller, ‘briefcase’ companies to fall away.”
European traders said that fixing petrol cargoes to Nigeria has been difficult over the last few weeks as financing is tricky to obtain.
“The banks are worried they won’t get paid, so traders have to pay up to get the financing,” said another broker.
Although there have been no official gasoline allocations since the government tried to remove the subsidy, some buying has been seen over the past week.
“We have definitely seen more demand in the past week, so it looks like they are starting to take in oil again,” the broker said.