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Fears removal of fuel subsidy could cause unrest

07 May 2015, 17:05

Abuja - There are fears the withdrawal of the fuel subsidy by the incoming administration could result in the recurrence of the unrest that followed such a decision a few years ago.

Rand Merchant Bank (RMB) said on Thursday said while the withdrawal of the petroleum subsidy might assist in realigning the government’s spending bias, it was likely to be met with widespread criticism as the aid was perceived to be an indirect form of wealth redistribution to the poor.

“The government will be wary of a re-enactment of Occupy Nigeria, a socio-political protest movement against the abolition of the fuel subsidy in 2012, which crippled industry. It can be argued that the petroleum subsidy provides little benefit to consumers as private retailers are reluctant to lower the pump price due to structural inefficiencies in Nigeria’s downstream sector. However, the ideological underpinnings and the prevailing fuel shortage across the country could lead to civil unrest,” the global economic thinktank stated.

The sentiment came as, with less than three weeks to the presidential inauguration, the current administration is making sweeping changes to the 2015 federal budget.

Having downwardly revised its forecasts last week, the finance ministry has announced that the fuel subsidy will be slashed by 90 percent this year, freeing up almost US$5 billion of much needed funding.

The state has been forced to already spend 50 percent of its planned borrowings for 2015 owing to depressed revenues.

Also read: Reps oppose fuel subsidy removal

“The effect on the real economy will be evident in the rapid increase in fuel and food inflation, alike to 1Q12 (first quarter 2012). Higher wage demands are unlikely to be met as industry struggles to absorb the significant increase in overhead costs. Theoretically, the deregulation of the industry and removal of the subsidy should encourage considerable investment into the downstream sector,” said RMB.

The think-tank said while the subsidy cut had been ratified by Parliament, the newly elected administration might effect changes to the agreed budget and implement a targeted cash transfer programme similar to Armenia.

“In the interim, the onus will fall on the central bank to manage the anticipated quickening in inflation.”

The Monetary Policy Committee’s next sitting is scheduled for the end of May.

- CAJ News


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