One of the worst fuel crises the country has experienced, which crippled economic activity and increased uncertainty in an already fragile post-election environment, ended early this week. The crisis, which started in late February/early March, was caused by a dispute over non-payment of $1bn between the outgoing Jonathan administration and the Major Oil Marketers’ Association of Nigeria (Moman).
Moman members are normally paid in arrears by anywhere up to 30 days, however, the current delay extended over 60 days, leading Moman to take action. The agreement struck on May 25 to end the dispute appears to be holding and Moman members have resumed fuel distribution across the country. The effect of the crisis has had a major effect throughout the economy, albeit only temporary. As a result, growth will slow, inflation will accelerate, and the exchange rate will come under renewed pressure.
Business activity has been severely affected across the economy, and it will take 4-8 weeks for most businesses to resume normal operations. Besides airlines, which could not obtain aviation fuel, phone companies such as MTN Group and domestic banks had ground to a halt for lack of electricity, Reuters reported. MTN said on Tuesday that its Nigerian services continued to be hampered despite the end of the fuel strike. ‘Diesel is still not easily available at this time…It is likely to take some time for normality to be restored,’ Funmilayo Onajide, a spokeswoman for the company, said. Some banks said their opening hours had returned to normal after being forced to close early on Monday.
In addition, firms’ cash-flow has come under pressure, resulting in increased payment delays. ‘As a result, real growth, which slowed to 4 percent year on year (y/y) in Q1 2015, down from 6 percent y/y in Q4 2014, is likely to slow further in Q2,’ analysts at pan-African bank, Ecobank, said in a research note on May 26. ‘In contrast, inflation will accelerate as transport disruptions push up domestic prices – annual inflation accelerated 8.7 percent in April 2015, from 8.5 percent in March, increasing the scope for a policy tightening,’ the analysts added. Higher inflation will also put pressure on the exchange rate, already down 7.3 percent YTD. The crisis could also increase some investor uncertainty as the new government takes office, leading to a naira-denominated assets sell-off.
Despite the agreement, the risk of another crisis remains high in the absence of an effective strategy to deregulate Nigeria National Petroleum Commission (NNPC) and/or complete reform of the controversial fuel subsidy system. NNPC was identified in a report approved by the former Governor of the Central Bank of Nigeria (CBN), Lamido Sanusi, as misappropriating $20bn in revenues that should have been passed onto the Federal government – this was slater reduced to $10bn.
Accounting firm PwC is yet to come up with a total amount of misappropriated funds that should have been legally remitted to Treasury, sustaining uncertainty over the short term.
Fuel subsidies currently cost an equivalent of $7bn per year – an unsustainable cost to the economy given the fiscal deficit of 2.8 percent of GDP will likely remain large for as long as oil prices remain low. However, the timing of the crisis could be good for President-elect Buhari who will be sworn into office on May 29. His government could use the opportunity to effectively resolve the long-standing fuel subsidy issue, thereby removing this contentious issue.