In a recent economic projection, prominent Nigerian economist and Chief Executive Officer of Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane, has warned that the latest surge in petrol prices, which saw an increase of 50.1% from N568 to N855 per liter, would have profound consequences for Nigerian consumers.
Speaking during his monthly presentation at the Lagos Business School (LBS) Breakfast, titled, “All That Glitters are Not Gold,” Rewane noted that this price hike is likely to worsen the country’s energy poverty crisis, drawing N5 trillion from consumers to the government’s coffers.
“The macroeconomic and welfare impact of the new petrol price implies that N5 trillion is withdrawn from consumers and transferred to the government,” Rewane explained.
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He added that this shift would likely exacerbate energy poverty in the nation, predicting that the number of Nigerians trapped in energy poverty will rise from 161 million in 2023 to 168 million by 2025.
Though Rewane acknowledged that the price increase could potentially strengthen the naira as liquidity diminishes, he cautioned that this might come at the expense of social stability.
“Exchange rate could strengthen as liquidity decreases and fiscal deficit declines, but this price hike may instigate social unrest as citizens react in frustration,” he stated.
The price jump, according to Rewane, could also drive re-inflation, particularly as logistics costs skyrocket and consumer demand declines due to shrinking household income.
In addressing possible relief for consumers, Rewane pointed to the commencement of petrol production by the Dangote Refinery, which could help alleviate supply challenges. However, he noted that the price of petrol will still largely depend on global crude oil prices.
“The start of petrol production by Dangote refinery will offer relief to consumers by addressing the supply challenges and guaranteeing quantity and quality of refined products, but not the price,” Rewane said.
He further explained, “No producer will sell below its production cost, and the domestic price of petrol depends on the global price of oil.”
The economist also predicted that the smuggling of petrol to neighboring countries within the Economic Community of West African States (ECOWAS) would reduce once the Dangote Refinery began production, as the refinery would be able to sell directly to these nations.
“Nigeria’s demand for PMS will stabilize at 35 million liters per day,” he projected, further suggesting that the refinery’s operations would improve supply and alleviate fuel scarcity.
He delved into the broader economic implications of these developments, stressing that the Dangote Refinery’s operations could boost Nigeria’s GDP and aggregate output. Additionally, Rewane highlighted that the increase in petrol supply could eliminate long queues at filling stations, improve the quality of fuel, and bolster employment opportunities.
“The macroeconomic impact of the Dangote refinery will include an increase in petrol supply, elimination of petrol queues, improvement in quality of petrol product, increased GDP output, and improved balance of trade,” he noted.
However, despite the potential benefits, Rewane warned that the inflationary pressures resulting from the recent petrol price increase could prevent the Central Bank of Nigeria (CBN) from reducing interest rates anytime soon. He commented on the analysts’ expectations of monetary easing after the 850 basis points hike in the Monetary Policy Rate (MPR), saying, “The petrol price spike will renew inflationary pressures. Therefore, analysts’ expectations for a slash in interest rate will have to wait until January 2025.”
Rewane also pointed out that Nigeria’s structural challenges continue to drive inflation, and fiscal policies are required to address these issues.
“Fiscal policies are also needed to tackle structural inflation drivers, such as insecurity, infrastructure deficiencies, and import dependence,” he advised.
His assessment of the current economic landscape suggested that Nigeria’s GDP numbers might not fully reflect the realities on the ground, particularly about employment and productivity.
He highlighted that only 27.74% of GDP activities expanded in Q2 2024, while 54.35% slowed and 23.91% contracted. This sluggish growth, he argued, has grave implications for employment opportunities, especially in labor-intensive sectors.
“Sectors that expanded in Q2’24 are mainly labor inelastic sectors,” Rewane explained.
He added that manufacturing, agriculture, construction, real estate, and trade all slowed in Q2 2024 compared to the same period in 2023.
“The economic implications are reduced employment opportunities, slower economic growth, supply chain disruptions, increased import dependency, and rising inequality,” Rewane remarked, outlining the challenges facing the Nigerian economy as it contends with rising inflation and reduced productivity.
On the issue of electricity generation, Rewane projected a positive outlook, stating that increasing Nigeria’s electricity generation to 6,000 MW from the current 4,000 MW within the next six months would lead to significant improvements in economic stability and industrial output.
“A 1,000 MW increase in power generation will lead to a 0.5% rise in GDP,” Rewane predicted, highlighting the potential for enhanced foreign direct investment (FDI), job creation, and productivity gains across the country.
“Consumers will benefit from reliable access to electricity, decreased cost of generator use, improved comfort, and increased disposable income,” he added.
How Much Will Dangote Refinery Sell Fuel?
Despite widespread expectations that the Dangote Refinery would help reduce fuel prices in Nigeria, recent events and prevailing market realities indicate otherwise. Initial hopes hinged on the refinery’s capacity to produce domestically refined fuel at a cheaper rate, providing much-needed relief to consumers.
However, emerging trends suggest that the refinery is likely to sell petrol at over N1,000 per liter once it begins full operations. This possibility has further dampened expectations, as Nigerians continue to grapple with rising energy costs.
While President Bola Tinubu has directed the Nigerian National Petroleum Company Limited (NNPCL) to supply crude oil to the Dangote Refinery in naira—bypassing the foreign exchange cost that has previously inflated production expenses—the refinery’s current stock was purchased in dollars. This means that its pricing structure is still heavily influenced by international market forces.
Analysts predict that the refinery will price its products accordingly, reflecting global crude oil prices rather than domestic conditions. With this in mind, the refinery’s operations may not immediately translate into lower prices for Nigerian consumers.
In the coming months, the reality of these dynamics is expected to unfold, leaving Nigerians bracing for the possibility of higher petrol prices, despite the much-anticipated boost in local fuel production.