Economic Implications of Nigeria’s move to remove electricity subsidies while hiking Customs Exchange Rates

The Nigerian government’s recent decision to reconsider electricity subsidies due to significant debts and the consequent increase in customs exchange rates has sparked a debate among economists and stakeholders.

The Minister of Power, Adebayo Adelabu, recently shed light on the unsustainable nature of electricity subsidies, citing substantial debts owed to generating companies (GenCos) and gas firms. Adelabu highlighted the need for a transition to a cost-effective tariff model to address the mounting financial burden on the government.

However, the issue of electricity subsidies in Nigeria is a longstanding and contentious one, deeply intertwined with the country’s economic challenges and energy sector dynamics. The decision to reconsider these subsidies stems from the significant financial burden they impose on the government, according to the Minister of Power.

The Minister revealed the immense debts owed to generating companies (GenCos) and gas firms, amounting to N1.3 trillion ($1.3 billion.) He said this staggering debt burden has necessitated a reassessment of Nigeria’s approach to electricity tariffs and subsidies.

Adelabu attributed the collapse of the grid multiple times to various operational challenges, including a lack of gas, aging infrastructure, and insufficient capacity, which further denotes the urgency for reforms in the power sector. These challenges not only hinder reliable electricity supply but also contribute to the financial strain on the government as it seeks to maintain subsidies amidst mounting debts and operational inefficiencies.

The government’s proposal to transition towards a cost-effective tariff model is driven by the need to address these systemic issues and ensure the sustainability of the electricity sector.

However, such a transition is not without its challenges, particularly in a country where access to electricity remains a pressing issue for millions of citizens. Any adjustment to electricity tariffs or subsidies is expected to be carefully calibrated to avoid disproportionately burdening vulnerable segments of the population.

Against this backdrop, the government’s decision to increase customs exchange rates has raised concerns among economists and industry stakeholders. The Central Bank of Nigeria (CBN) announced a series of upward adjustments in the customs exchange rate, culminating in a 2.56% increment on February 14, 2024.

This move aims to boost Internally Generated Revenue (IGR) through enhanced customs duties. However, economists caution that such measures could worsen the economic plight of Nigerians.

The Automobile Manufacturers and Importers Association in Nnewi, Anambra State has voiced concerns regarding the continuous escalation of customs duties. President of the association, Austin Jideofor, highlighted the adverse impact on consumers, citing increased prices of essential commodities such as rice, cement, spare parts, and generators.

He said the high cost of clearance exacerbates economic hardship on consumers, as regulatory agencies levy additional fees.

Jideofor’s concerns echo broader sentiments within the business community, where stakeholders fear that rising import duties will inflate the cost of goods and services, further straining household budgets already stretched by inflation and economic uncertainty. The reliance on the exchange rate to determine duty payments exacerbates the problem, as fluctuations in currency values directly impact import costs.

Moreover, the timing of these policy adjustments is particularly concerning given the prevailing economic hardships facing Nigerians. With inflation hovering at double-digit levels (more than 28%) and unemployment rates rising, the decision to remove electricity subsidies and increase customs exchange rates could deepen the financial woes of ordinary citizens. The disproportionate burden falls on low and middle-income earners, who bear the brunt of rising prices without corresponding increases in income.

Economists argue that increasing customs exchange rates exacerbate inflationary pressures, as higher import costs translate into elevated consumer prices across various sectors. This contributes to a vicious cycle of rising inflation, diminished purchasing power, and economic stagnation. In the context of Nigeria’s fragile recovery from the COVID-19 pandemic and global economic headwinds, such policies risk derailing efforts to foster sustainable growth and development.

Furthermore, the reliance on import duties as a revenue source underpins the need for comprehensive fiscal reforms to diversify revenue streams and reduce dependency on volatile external factors. While customs duties constitute a significant source of government revenue, over-reliance on this mechanism undermines long-term economic resilience and stifles innovation and productivity.

Both experts and stakeholders believe that the Nigerian government’s decision to reconsider electricity subsidies while increasing customs exchange rates poses significant economic challenges amidst prevailing hardships. They call on policymakers to adopt a holistic approach that prioritizes economic stability, social welfare, and sustainable development to mitigate these risks and promote inclusive growth,

“As soon as Mr. President orders a halt to the increase in import duties, hardship will drop,” Jideofor aptly remarked.