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February 27, 2012

Nigerian Oil, Subsidies and Strikes

Caitlin in Kenya2

Analyst Insight by Daniel Tarling-Hunter

On January 1st 2012 in an attempt to lower pervasive corruption, the Nigerian government abruptly repealed its cap on petrol prices. Overnight, oil prices doubled from NGN65 to NGN140 per litre, leading to outcry by the Nigerian population as transport and food prices climbed abruptly, affecting incomes significantly. National strikes began on the 9th January and evolved into protests against endemic corruption, leading to the return of a smaller fuel subsidy.

Corruption and Competitiveness Scores in Nigeria and Selected countries: 2011

 

ScreenHunter_03 Feb. 27 17.09

Source: Euromonitor International from Transparency International, World Economic Forum

Note: CN = China, IN = India, JP = Japan, AR = Argentina, BR = Brazil, OO = Cameroon, GH = Ghana, KY = Kenya, NG = Nigeria, SA = Saudi Arabia, ZA = South Africa, TU = Tunisia, US = United States, GB = United Kingdom. The Global Competitiveness Index measures the microeconomic and macroeconomic foundations of national competitiveness, taking into account 12 subjects. The score is from 1 to 7 with 7 indicating a very competitive economic environment. The index ranked 142 countries worldwide in 2011. Transparency International’s Corruption Perceptions Index is the main tool used for measuring a country’s perceived levels of corruption in the public sector. A score of 10.0 indicates a very clean economy, while 0.0 denotes very high corruption levels. The index ranked 183 economies in 2011, as determined by expert assessments and opinion surveys.

  • The aim of the subsidy cut was to divert government expenditure to infrastructure and reduce abuse of the subsidy. The country's infrastructure is weak as government projects have been riddled with corruption and mismanagement. According to the EIA (US Energy Information Administration) Nigeria, one of the 15 highest oil producing countries in the world, imports 50% of its petroleum products as run down refineries cannot produce enough fuel for the country's needs;
  • Much of the low income majority in Nigeria see fuel subsidies as one of the few supportive measures the Nigerian government offers. The 6 days of strikes eventually forced Goodluck Jonathan, the Nigerian president, to temporarily reinstate a smaller subsidy, capping fuel prices at NGN97;
  • Corruption within the Nigerian economy is widespread; the country ranked 143rd in the Global Corruption Perceptions Index 2011, out of 183 countries.

Implications

  • Nigeria is one of the most unequal countries in the world with 38,700 consumers aged 15+ earning a gross income of above US$150,000 in 2011, while 25,375,300 consumers lived on an income of up to US$500 a year. A lack of mitigating policy meant the poor were the hardest hit by the subsidy cut. Hikes in transport costs and the knock-on effects on inflating food prices caused an immediate squeeze on disposable incomes;
  • The hike in prices on essential goods is also a setback for an emerging middle class, having a crushing effect on discretionary spending potential;
  • Infrastructure development has been slow as a result of corruption. In 2011 the World Bank ranked Nigeria 176th out of 183 countries in its ease of getting electricity index, as major outages and shortages pervade the country. This has created a poor business environment, with many manufacturers manufacturing in countries around Nigeria instead;
  • Poor working conditions have stunted growth in numerous industries. Manufacturing output for example grew by an average of just 1.2% per year in real terms between 2006 and 2011. Declining as a percentage of GDP in this period, the sector made up 2.0% of output in 2011. Nigeria has continued to rely on oil extraction for growth;

GDP by Origin in Nigeria: 2011

 

ScreenHunter_04 Feb. 27 17.10

Source: Euromonitor International from national statistics

Note: A = Agriculture, Hunting, Forestry and Fishing, B = Mining and Quarrying, C = Wholesale and Retail Trade; Repair of Motor Vehicles, Motorcycles and Personal and Household Goods, D = Financial Intermediation, Real Estate, Renting and Business Activities, E = Transport, Storage and Communications, F = Manufacturing, G = Construction, H = Education, Health, Social Work and Other Community, Social, Personal Service Activities, I = Public Administration and Defence; Compulsory Social Security, J = Hotels and Restaurants, K = Electricity, Gas and Water Supply

• Development of industry outside of oil has been made. Agriculture grew on par with oil extraction at an average yearly rate of 7.1% in real terms between 2006 and 2011, while growth in Nigeria's services sectors, including health and education grew at 9.4% per year in real terms albeit from a low base. In 2010 three Nigerian sovereign wealth funds were set up to funnel oil revenues into development projects and stabilisation of the economy.

Prospects

The government has announced steps towards licensing oil refinery to private companies in the country, while further embracing international opportunities for development. The temporary nature of the return to the petrol subsidy demonstrates a resolve to reducing corruption and supporting economic growth through infrastructure spending. A first step has been the authorisation of the Economic and Financial Crimes Commission to investigate corruption related to the fuel subsidy and the oil industry as a whole.

Better infrastructure and lower corruption is likely to foster foreign direct investment (FDI), a major driver for employment and industrial development. In 2010 (last date available) Ghana, a country with a similar economic makeup to Nigeria but lower levels of corruption had an FDI intensity (FDI as % of GDP) of 7.8%, while Nigeria's was 3.1%. On-going discontent in Nigeria, especially in the north threatens to damage growth prospects.

Euromonitor International expects output in the Nigerian economy to grow on average by 6.2% per year in real terms between 2011 and 2016 as development continues. However gross incomes will continue to see subdued per capita growth at an average annual rate of 1.4% in real terms between 2011 and 2016.

 


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