How Nigeria’s fuel price increase will impact inflation

  

Nigeria’s labour unions on Monday suspended a nationwide strike after President Goodluck Jonathan agreed to a compromise on the scrapping of the fuel subsidy.

1 January 2012 marked the doubling of the pump price of petrol, from 65 naira per litre to around 140 naira, due to the Nigerian government’s decision to stop subsidising fuel. Although the government initially said the price increase was irreversible, it was forced over the weekend to announce a price reduction to 97 naira. Nigeria’s labour unions have not yet agreed to the reduced price, but have decided to call off the strikes.

The increase in the fuel price is likely to lead to a rise in inflation. Renaissance Capital noted on 6 January, when the full removal of the subsidy was still in effect, that it expects inflation to rise from a projected average of 11% in 2011 to 15% in 2012. The reduced price hike is, however, expected to have a more moderate impact on inflation.

“The impact of the petrol price hikes could go beyond simply pushing up transport costs. It is also expected to affect the cost of producing goods and services. In particular, the prices of food, clothing and footwear, furnishings, as well as housing and utility costs may tick up on the back of the scrapping of the petrol price subsidy. In addition to higher petrol prices, the cost of producing electricity from petrol-powered generators is also expected to rise,” said Yvonne Mhango, an analyst at Renaissance.

Mhango said the impact of a higher petrol price on food is likely to resonate with most Nigerians. Rough estimates suggest that transport costs account for about 10% of the total cost of producing food in Nigeria. The cost of electricity used to process food is estimated to be around 5% of total production, since only a small percentage of Nigeria’s food is processed.

Although President Jonathan has agreed to a compromise on the petrol price hike, Renaissance says the government will remain committed to completely scrap the subsidy. “Since 2000, the authorities have announced seven petrol price hikes, and each time the price hike was negotiated down following strike action. We think the government will remain committed to removing the contentious petrol subsidy and redeploying the saved funds for more productive expenditure, but will still bow to popular pressure and phase out rather than simply scrap the subsidy.”

Mhango noted that a higher petrol price will have a minimal impact on real GDP growth. “Prior to the removal of the petrol subsidy, we expected the Nigerian economy to grow 7% in 2012. We now expect high petrol prices to dampen household consumption and private fixed investment. But we expect this to be partially countered by higher public fixed investment, as the government redeploys some of the funds to infrastructure expenditure. Therefore, we think growth of 6.5% to 7.0% is more likely in 2012, which is still strong compared with the regional and global growth averages.”



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