The Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, has disclosed that the Nigerian government has saved approximately $20 billion, equivalent to 5% of the nation’s GDP, due to the implementation of critical reforms in fuel and exchange rate policies.

This achievement resulted from efforts under President Bola Tinubu’s administration to transition to market-based pricing for Premium Motor Spirit (PMS) and the exchange rate. Edun made these remarks during the validation of federal civil service policies in Abuja, marking the first 100 days of Mrs. Esther Didi Walso-Jack as Head of Civil Service of the Federation.

According to him, the savings stemmed from the removal of fuel and foreign exchange subsidies, which previously drained government coffers. Edun highlighted that maintaining these subsidies had cost the country around $20 billion annually, funds that could have been redirected to critical sectors like infrastructure, health, education, and social services. He emphasized that the policy shift has freed up these resources that are now accessible for meaningful investments in national development.

“An amount of five percent of GDP is what those two subsidies were costing when there was a subsidy on PMS; when there was a petroleum product generally for a long time and when there was a subsidy of foreign exchange. Between them, they cost five percent of GDP.

“If you say GDP was on average, let’s say $400 billion. We all know what five percent of that is – $20 billion of funds that could be going into infrastructure, health, social services, and education.

“And that is what the flow is now coming back into government’s coffers to be able to be deployed in those areas,” he said.

End of Rent-Seeking Opportunities

Edun criticized past practices where individuals and entities exploited the subsidy regime and central bank policies for personal enrichment. These rent-seeking activities allowed individuals to profit without adding value to the economy. He commended the reforms for eliminating these avenues, fostering an environment where wealth creation depends on genuine enterprise and innovation.

“The real change that has happened with the measures of Mr. President is that nobody can wake up and their target for the day or for the week or the month or the year is to get access to cheap funding, cheap funding exchange from the central bank, which they can now flip.

“And overnight, they became wealthy from no value added for doing nothing virtually except you know the right people. Similarly, they can no longer try and be part of a new peak, market and very inefficient petrol subsidy regime as a way of making money overnight,” Edun said.

Economic Opportunities in Agriculture and Exports

The Finance Minister urged Nigerians to embrace new economic opportunities presented by the reforms. He pointed to agriculture and manufactured exports as avenues where individuals can thrive.

He said that the relatively weaker naira, while a challenge domestically, enhances competitiveness for exports such as cosmetics and hair extensions to markets like Kenya, Egypt, and South Africa.

Edun advocated for increased productivity, suggesting that heightened agricultural output could ease elevated food prices, while export-driven industries could create jobs and reduce poverty.

While the savings from the reforms and their long-term benefits are expected, the policy changes have brought immediate economic pain. Higher fuel prices and depreciated naira have increased living costs, raising concerns about the reforms’ social impact.

Critics argue that without robust social safety nets, the economic hardship could overshadow the potential gains.

However, Edun remains optimistic. He said, “The incentive framework has shifted from one of rent-seeking to one that rewards innovation, hard work, and enterprise. This change will create jobs, help reduce poverty, and build a resilient economy.”

If $20bn Was Saved, Why Is the Govt. Still Borrowing?

The statement by Edun that the government saved $20 billion from the removal of the fuel subsidy has raised significant questions about the country’s financial trajectory, particularly regarding its continued reliance on borrowing. Many are now questioning why, despite such substantial savings, the government still resorts to domestic and external loans to fund its expenditures.

The removal of the fuel subsidy hailed as a landmark policy by President Bola Tinubu’s administration, was expected to alleviate fiscal strain. The subsidy had long been criticized for benefiting a select few and contributing to economic distortions.

However, despite these proclaimed savings, the government continues to grapple with fiscal deficits that it has relied on borrowing to address. For instance, the Nigerian Senate, on Friday, approved President Bola Tinubu’s request for a fresh N1.77 trillion ($2.2 billion) external loan to partially finance the country’s N9.7 trillion budget deficit for the 2024 fiscal year.

This reliance on borrowing has raised doubts about whether the savings from the subsidy removal are being efficiently utilized or if they are sufficient to address the country’s pressing financial needs.

It is believed that so far, there is no evidence of the gains from the fuel subsidy removal in Nigeria’s economic and infrastructural development. Many are pointing at the country’s fiscal deficit and growing debt as evidence that the subsidy removal is not yielding the promised result.

Tinubu has borrowed $6.45 billion from the World Bank in just 16 months, according to a document on the global lender’s website. The resulting increase in Nigeria’s public debt profile has compounded the burden of debt servicing on the country’s finances.

The Central Bank of Nigeria (CBN) recently reported a staggering $3.58 billion spent on servicing foreign debts in the first nine months of 2024, a 39.77% increase from the $2.56 billion recorded during the same period in 2023.

The Nigerian National Petroleum Company Limited (NNPC) has directed oil marketers to halt petrol imports, counting on the Dangote Refinery to meet the country’s fuel demands.

According to BusinessDay, this mandate was disclosed at a high-level meeting in Abuja, attended by NNPC Group CEO Mele Kyari, representatives of the Major Oil Marketers Association of Nigeria (MOMAN), Depot and Petroleum Products Marketers Association of Nigeria (DAPPMAN), and other key stakeholders.

NNPC declared that all petrol supplies would now hinge on clearance from the Dangote Refinery, which reportedly has the capacity to cater to Nigeria’s fuel needs. This refinery, operational since January 2024, has produced diesel, jet fuel, and other products mainly for international markets.

Recently, it began supplying petrol domestically, adhering to premium quality standards of 10ppm sulfur content, a significant improvement over the 50ppm standard previously dominant in Nigeria.

While the refinery’s capacity is significant, oil marketers have questioned its ability to handle Nigeria’s fluctuating fuel demand reliably. Additionally, marketers raised concerns about the refinery’s payment structure, which requires advance payment—unlike the traditional post-delivery settlement model. This shift could strain the liquidity of smaller players in the downstream sector.

BusinessDay quoted one marketer as saying, “Paying upfront significantly increases financial pressure, especially for businesses with limited capital.”

The quality of Dangote’s fuel has introduced a price differential compared to imported alternatives, which typically have a higher sulfur content (50 ppm). While Dangote’s product aligns with global standards, some marketers have reportedly undercut its prices by sourcing cheaper, lower-quality imports, exacerbating market challenges. Dangote Refinery has accused these activities of distorting the market and even threatened legal action against NNPC for continued fuel imports.

Mele Kyari recently stated that the NNPC had ceased fuel imports and was sourcing products exclusively from domestic refineries. However, this claim faced scrutiny as documents revealed significant fuel importation volumes between October and November 2024.

The NNPC clarified that Kyari’s statement was taken out of context, explaining that while it prioritizes local refineries, importation remains an option when economically viable.

However, the Independent Petroleum Marketers Association of Nigeria (IPMAN), announced earlier this week that it has reached an agreement with Dangote Refinery for fuel supply.

As part of this significant agreement, the refinery will supply 60 million liters of petrol each week to IPMAN. This partnership could see the association receiving up to 240 million liters of petrol monthly.

The Challenge of Crude Oil Supply

While the directive underscores the government’s reliance on the Dangote Refinery to stabilize Nigeria’s fuel supply, a giant obstacle stands in the way. Challenges surrounding crude oil supply to the refinery have cast doubt on the viability of this initiative.

The success of this policy hinges on uninterrupted crude oil supply to the Dangote Refinery. However, The NNPC has struggled to meet its obligations under its stock agreement with the refinery. Dangote Refinery recently disclosed that the NNPC is failing to fulfill its crude oil supply commitments, especially under the much-publicized naira-for-crude agreement.

This arrangement was designed to ensure that the NNPC supplies crude oil to the refinery in exchange for naira payments, a system projected to save Nigeria up to $8 trillion annually. Unfortunately, these supply disruptions have forced the Dangote Refinery to procure crude oil from international markets, including the United States, paying in dollars—a practice that undermines the purpose of the agreement.

The decision to prioritize Dangote Refinery is expected to bolster the naira in the foreign exchange market by reducing the demand for dollars typically needed by importers.

Curbing the dollar demand associated with petrol importation was touted as a way the naira’s performance in the FX market could stabilize. Analysts project that this directive could significantly lower Nigeria’s annual dollar outflows, allowing more resources to be channeled toward other economic priorities.

Stakeholders are expressing concern about the sustainability of the directive, given the refinery’s operational challenges. Market experts worry that inconsistent crude oil supply and the refinery’s financial pressures could disrupt the envisioned stability in Nigeria’s fuel market.

The failure of the naira-for-crude agreement not only threatens Nigeria’s FX goals but also risks destabilizing the refinery’s pricing and distribution plans. If crude oil procurement costs remain high, it may lead to higher petrol prices, further straining consumers already grappling with economic hardship.