Page 6 - AfrOil Week 25 2021

AfrOil COMMENTARY AfrOil

Higher crude oil prices

bring no joy to Nigeria

Domestic petroleum product price subsidies are acting as a drag on the West African state’s economy

BRENT crude prices have risen by more than that Abuja ought to take action now.
45% since the beginning of the year, reaching Last week, the organisation voiced concern
WHAT: their highest point since October 2018. They about the renewal of fuel subsidies in Nigeria,
The increase in Brent topped $75 per barrel on June 22, up from $51.8 even though officials in Abuja claimed in March
crude prices will have a as of January 1. that they had put an end to them. Following
limited positive impact on This rise ought to be good news for Afri- virtual meetings with Nigerian authorities, the
the Nigerian economy. ca’s largest oil producer Nigeria, which took IMF reported in a statement that its team had
a financial hit last year when global energy “expressed its concern with the resurgence of
WHY: markets plummeted in response to the coro- fuel subsidies.”
Abuja subsidises domes- navirus (COVID-19) pandemic and the price The fund asserted that fuel subsidies were
tic fuel prices, so it must war between Russia and Saudi Arabia. After not the only drag on Nigeria’s economy and
spend more money when all, when Brent prices rise, Nigerian crudes also urged the government to continue with efforts
oil markets are bullish.
gain value, since they are indexed to Brent. to standardise its exchange rates. “The mission
WHAT NEXT: However, the price increase is a matter of recommended maintaining the momentum
The government has not concern for Mele Kyari, the group managing toward fully unifying all exchange rate windows
indicated whether (or ex- director of Nigerian National Petroleum Corp. and establishing a market-clearing exchange
actly when) it will change (NNPC). Kyari pointed out last week that the rate,” it said.
its pricing policy. country’s economy might suffer if crude prices The IMF was referring to Nigeria’s decision
climbed too high. to introduce multiple competing naira exchange
rates five years ago in order to prevent a major
Financial impact of subsidies devaluation of the currency. Since then, the
He indicated that his worries stemmed partly Central Bank of Nigeria (CBN) has allowed the
from the possibility that high prices might lead official value to weaken in an attempt to bring it
consumers to buy smaller amounts of crude and into line with the NAFEX rate.
refined fuels. Reuters noted last week that the IMF had
“In a resource-dependent nation like Nigeria, made its statement after the World Bank criti-
when [the oil market] gets too high, it creates a cised the CBN’s actions. According to the World
big problem because your consumers shut down Bank, the news agency said, the CBN’s manage-
their demand. Demand will go down and obvi- ment of the foreign exchange regime has limited
ously even as the prices go up, you will have less access to forex, hindering confidence and appe-
volume to sell,” he said at Citizens Energy Con- tite among investors.
gress, a virtual forum organised by DMG Events. On a more positive note, the IMF has also
The NNPC chief also pointed out that high acknowledged that Nigeria’s banking indus-
crude prices had a negative effect on Nigeria’s try remains well-capitalised, with the level of
finances because of the government’s policy of non-performing loans (NPLs) contained. “Nev-
subsidising domestic petroleum product prices. ertheless, it remains to be seen what share of
When oil is more expensive, he explained, Abuja forborne loans may turn non-performing as the
must spend more in order to ensure that fuel impact of the pandemic abates,” the fund said in
prices do not exceed the target figures. “[For] its statement.
us as a country, as prices go up, the burden of
providing cheap fuel also increases and that’s a Mixed signals
challenge for us,” he said. It is not yet clear how Nigeria intends to proceed
He went on to say, though, that world crude with respect to fuel price subsidies.
markets had not yet reached the point of making In March, NNPC spokesman Kennie Obat-
Nigerian fuel subsidies unsustainable. “[On] a eru indicated that the state had opted to return
net basis, you know, the high prices, as long as to subsidising petroleum product prices in
[oil] doesn’t exceed $70 to $80 [per barrel], it’s order to preserve social stability. He explained
okay for us.” that Abuja was keen “not to jeopardise ongoing
engagements with organised labour and other
IMF concerns stakeholders on an acceptable framework that
The International Monetary Fund (IMF) will not expose the ordinary Nigerian to any
appears to have reached the conclusion, though, hardship.”

P6 www. NEWSBASE .com Week 25 23•June•2021