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Oil at the heart of Nigerian politics

The Nigerian economy risks being brought to a virtual standstill by the current national strike. The country’s influential trades’ union movement has opted for all-out industrial action in response to the removal of fuel subsidies by the federal government in Abuja. The subsidies cost the government an estimated $8 billion a year; a huge sum in comparison with the total federal budget of just over $22 billion. Given that the country needs massive investment in infrastructure and social services, Abuja’s stance seems entirely reasonable, but the dispute is far more complicated than it may seem.

First of all, Nigeria is in the very odd position of having to import much of its fuel needs, despite being Africa’s biggest oil producer. The country’s four oil refineries have been working at reduced output or indeed entirely out of action for more than a decade, while successive governments have made repeated promises that they are on the verge of being reopened. At the same time, vast amounts of money are made by importing refined petroleum products, most diesel, and so there vested interests in keeping the refineries out of action.

Next, the practice of subsidising fuel prices creates a range of imbalances that encourage theft and smuggling. Diesel and petrol has traditionally been cheaper in oil-producing Nigeria than in the net oil-importing states in the rest of West Africa. IMF studies in the past have shown that, when the price differential reaches its peak, most of the fuel consumed in neighbouring Benin is smuggled into the country from Nigeria. During the course of 2011, more than a dozen fuel tankers were seized by pirates off the coast of Benin, adding yet another dimension to the drama.

Despite the financial benefits of ending the subsidy, the manner in which it is being reduced seems badly judged, whether by intent or mismanagement. Rather than reducing it gradually over an extended period, Abuja has opted to end it in one fell swoop, resulting in diesel prices jumping from $0.40 a litre to $0.86 a litre overnight. This may seem determined rather than politically unwise but for one thing: the same party that rules Nigeria today has adopted the same strategy half a dozen times over the past twelve years and each time it has backed down and reinstated the subsidy. It is almost as if it were trying to fail.

The governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi is right when he says: “Subsidies should be subsidies for production and not for consumption.” Sanusi knows what he is talking about. He was justly selected as Person of the Year by Forbes Africa in November and has made huge strides towards reforming the country’s banking system and rooting out corruption. Yet it would not be surprising if fuel consumption subsidies were reintroduced once again in a move that would have little to do with national finances.