On January 1 2012 the Nigerian government announced the complete removal of the longstanding fuel subsidy on premium motor spirit with immediate effect. Although Nigeria is the largest producer of oil in sub-Saharan Africa, it remains a net importer of petroleum products due to the poor state of repair of its refineries, and the lack of suitable infrastructure and petroleum transportation network.

As a result, fuel subsidies on diesel, kerosene and premium motor spirit were introduced in the 1980s as part of the government's energy pricing policy. The subsidy on diesel was later removed and the market for diesel was deregulated. The subsidies remained on kerosene, which is sold at a guaranteed price of N50 a litre, and premium motor spirit, which was sold at a guaranteed price of N65 prior to the government's recent announcement. The fuel subsidies aimed to alleviate the cost of importing these products to Nigerian citizens, most of whom (according to World Bank surveys) live on less than $2 a day.

The government insists that it can no longer fund these subsidies as the cost of so doing is prohibitive. According to the Federal Ministry of Finance, in the five years before August 2011, total government expenditure on petroleum subsidies was N3.7 trillion, with a 160% increase in expenditure on subsidies from N261 billion in 2006 to N673 billion in 2010. Subsidy payments from January to September 2011 amounted to N1.4 trillion. It is also estimated that the cost of petrol in Nigeria is in the region of N138 a litre, which suggests that for every litre of premium motor spirit sold in Nigeria, the government assumes a direct cost of N73.

Following the government's announcement and the subsidy removal, there were various protests in many cities, culminating in the declaration by labour and union leaders of a nationwide strike on January 9 2012. The strikes were expected to continue until the reinstatement of the subsidy and the return of premium motor spirit to the pump price of N65. The Petroleum and Natural Gas Senior Staff Association of Nigeria also threatened to join the strike by shutting down oil production platforms on January 12 2012 if the government failed to reinstate the subsidy within 48 hours.

The strike lasted for six working days, bringing almost all economic activity to a halt nationwide. Nigeria's National Bureau of Statistics places Nigeria's revenue losses during the strike at an estimated N207 billion (approximately $1.3 billion). After numerous meetings with the Labour Congress and the Trade Union Congress, the government eventually agreed to reduce the pump price of premium motor spirit to N97 (approximately $0.61 a litre). This higher pump price has had an inflationary effect on goods and services within the country, with prices increasing by up to 50% in certain cases.

On February 13 2012 the president announced the inauguration of the Subsidy Reinvestment and Empowerment Programme, under which projects such as the construction, completion and rehabilitation of the railways, refineries, federal highways, hydro-stations, information technology and water supply are proposed to be executed. It is also intended that short-term social welfare programmes to alleviate the impact of subsidy removal on Nigerians (eg, the provision of mass transit, training in artisanship for unskilled youths, and social services to reduce high maternal and infant mortality rates) will be implemented.

It is expected that these projects will be funded by the government's portion of the redirected funds from the removal of the premium motor spirit subsidy, which is estimated at N478 billion for 2012. The government is embarking on initiatives to introduce the public to the benefits of the subsidy removal and to inform the public of the projects proposed to benefit from the redirection of the subsidy funds, in the hope that a complete deregulation of premium motor spirit will be achievable without incident in the near future.

For further information on this topic please contact Nnewuoghor Okhai-Akhigbe, Aniekan George Ikott or Ekundayo Onajobi at Udo-Udoma & Belo-Osagie by telephone (+234 1 263 4831), fax (+234 1 263 4541) or email ([email protected], [email protected] or [email protected]). The Udo-Udoma & Belo-Osagie website can be accessed at www.uubo.org.