The Nigerian government’s decision to deregulate the forex market is expected to increase the nation’s rate of economic hardship as the cost of goods and services will be determined by exchange rates – which have gone up since the decision was announced.
The economic impact is exacerbated by the government’s decision to remove subsidies: first fuel subsidy that has kept the cost of Premium Motor Spirit (PMS) affordable for the Nigerian people, especially, Small & Medium Enterprises (SMEs) that count on cheaper fuel to power their generators – as an alternative to an epileptic power supply. Then electricity subsidy, which was factored in the Electricity Bill signed by President Bola Tinubu earlier this month. The removal of electricity subsidy means electricity tariff will hence be based on the floated foreign exchange rates.
Currently, the Nigerian government pays N50 billion monthly to make up for the revenue shortfall in the power sector, thereby subsidizing electricity tariff for consumers. The removal of the subsidy is expected to increase the cost of electricity by as much as 40%, starting July, according to Guardian.
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The Nigerian Electricity Regulatory Commission (NERC) 2022 Multi-Year Tariff Order (MYTO) has a fixed price based on exchange and inflation rates, which have been impacted by the floating of the naira.
The regulator’s Service Based Tariff (SBT) was established based on an exchange rate of N441 per dollar and an inflation rate of 16.97%. The current tariff rose from cheaper tariffs previously determined by lower inflation and exchange rates.
The 2015 N60 per kilowatt tariff was based on N198.97 per dollar exchange rate. The average rate was reviewed upward in 2020 based on N383.80 per dollar while in 2022, it was N441.78 per dollar. Rising inflation rates were also considered during the tariff revision periods. In 2015, the inflation benchmark used by NERC’s MYTO was 8.3%, in 2020 it was 12%, and 16.97% in 2022, which is currently being used.
With the subsequent increase in inflation rates, which currently sits at 22.41%, and the spike in the exchange rate – orchestrated by the deregulation of the FX market, which has seen the naira depreciate to N770 per dollar, a higher tariff is expected to hit electricity consumers soon.
The bitter expectation is compounded by uncertainties surrounding both the FX market and inflation rates. Experts said there is a likelihood that the exchange rate will jump much higher than it is unless there is enough dollar liquidity to take pressure off the naira. The removal of fuel subsidy is also expected to push inflation further up to 30% in the coming months.
This backdrop means there is going to be a significant increase in electricity tariff. The cost is estimated to rise as much as N90/kilowatt, amid depleting purchasing power of consumers. This means that Nigerians may end up paying up to N5,000 for just 50 units of electricity.
The government decided to remove fuel subsidies and float the naira without making provisions for palliatives that will cushion the effects. The resulting effect is that the Nigerian public will be forced to rely on the N30,000 monthly minimum wage to confront the resulting rise in the cost of living.
Experts said the situation will impact the economy negatively. This is because Nigeria is not generating enough electricity at the moment.
Presently, Nigeria’s electricity generation strength is said to be wobbling at around 3,057.7MW from 17 power plants, falling short of the 5,000 megawatts a year supply, included in the contract the distribution companies (DisCos) signed with NERC.
This backdrop means that while Nigerians pay as much as N90 per kilowatt, they will still have to buy fuel at about N500 –N557 per liter to power their generators due to poor electricity supply emanating from insufficient power generation.
Economists have called on the government to conduct an upward review of minimum wage as a way of boosting the spending power of the people in the wake of these policies.
“Minimum wage of N30,000 is nothing. It must go up to a level that allows consumption. Inflation will rise and fall irrespective of minimum wage but consumption is tied directly to wage earnings and/or credit. Less than 5% of Nigerians have access to a bank loan, so minimum wage must go up,” financial expert Kalu Aja wrote.