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The current Russia and Ukraine impasse will cause escalation of energy prices [diesel, aviation fuel, kerosene and gas], mounting petrol import and subsidy bill and the aggravation of petrol smuggling in Nigeria, the Chief Executive Officer, CEO, of the Center For The Promotion Of Private Enterprise, CPPE, Dr. Muda Yusuf, has said
He also said it will heighten fiscal deficit, growing debt levels, spike in debt service payments, money supply growth, exchange rate depreciation and more intense inflationary pressures.
According to him, the cost of flour, price of bread and other confectioneries may also take a hit, adding that if the conflict is protracted, these would be the downside risks to the Nigerian economy.
He said Russia is the second largest producer of oil globally, even ahead of Saudi Arabia, producing 10 million barrels per day, stressing that there is likelihood that the conflict in the region would disrupt oil supplies, reduce output and trigger higher prices.
He added:“Already, oil price is above $100 and the impact on energy prices is already being felt around the world.In Nigeria, the deregulated components of petroleum products would witness sharp increases. These include diesel, aviation fuel and kerosene. Gas would suffer the same ate.
The escalation of these costs obviously has serious inflationary implications across sectors. The geopolitical tension of the recent weeks had actually bolstered energy prices even before the current onslaught by Russia. The situation may get worse if the conflict escalates. This would affect cost of production, profit margins, purchasing power and may further worsen the poverty situation.”
Nigeria,he noted, will begin to experience upsurge in petrol import and subsidy bill in coming months as the landing cost of petrol increases on the back of the rise in crude oil price.
He said:“Regrettably, we remain a major importer of petroleum products and typically when oil prices increase, petrol import bill and subsidy payment also increase. Only recently the NNPC made a request of N3trillion for petrol subsidy. With current turn of events, the subsidy bill would even be higher, creating serious fiscal challenge for government at all levels. These of course have serious implications for the budget and government finances.”
He said the scale of petroleum products smuggling will increase because of the impact of the crude oil price hike on relative prices.
The price differential between the cost of petrol in Nigeria [which is heavily subsidized] and the cost of petroleum in other countries in the sub region would be further widened, fueling more petrol smuggling.Therefore, the current domestic petrol consumption estimated at60 million litres per day is likely to further jump as the current developments provide even greater incentives for smuggling. That will put further pressure on the NNPC forpetroleum products supply for domestic consumption. This may perpetuate the current scarcity and fuel queues beyond initial expectations.
He stated that though high oil price increase, should be good news for oil producing countries as it typically impacts positively on foreign exchange earnings, foreign reserves and government revenue , however, Nigeria is a peculiar case because of the dysfunctional policies and regulations in oil and gas sector. “It is an irony that crude oil price increaseemasculates the Nigeria economy, rather than benefit it. This isbecause of the escalatingpetroleum products and subsidy bill. Consequently, fiscal deficit will be higher than projected, debt profile will increase, debt service commitment will rise and government borrowing will intensify. This may worsen an already weak fiscal space.”
Continuing he said, “With this scenario, we are likely to see an increased credit to government by the Central Bank of Nigeria, which will further increase money supply leading to higher inflation and further depreciation in the exchange rate. These are the regrettable fiscal trajectories of the current developments. We are likely to see a much more fiscal pressure on all levels of government.”
Speaking on its effect on trade, Yusuf said, bilateral discussions between the federal government and the Russian government on the resuscitation of Ajaokuta Steel Plant by the Russians had progressed significantly before the pandemic disruption and the conflict may cause a major setback to this agreement because of the torrent of sanctions against Russia.Nigeria also imports substantial amount of wheat which would also suffer some disruption and impact on prices.
He further warned that revenue allocation to the different levels of government may be adversely impacted because the substantial amount of NNPC’s resources will be consumed by the mounting subsidy payment in the unfolding scenario.
“Therefore, we may be on the verge of zero remittance by the NNPC to the federation account as a result of the rising subsidy commitment. This of course has grave implications for states, especially those that are heavily dependent on FAAC allocations. Their capacity to meet their obligations will be impaired. Their ability to pay salaries, pensioners, fund infrastructure, pay contractors will be weakened”
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