Nigerian bonds drop as investors worry about possible postponement of energy subsidy removal – After the Federal government of Nigeria indicated on Thursday that its plan to remove energy subsidies would be delayed beyond an earlier June 1 deadline, Nigerian dollar bonds suffered the largest losses among global emerging markets. The announcement rocked investor confidence, with many worrying that the decision to prolong subsidy withdrawal could exacerbate Nigeria’s budget difficulties.
Among the 645 bonds included in the Bloomberg Emerging Markets Sovereign Index, the 2051 debt performed the worst, losing nearly 2 cents on the dollar. After news of the failure of the subsidy removal plan made its way into Nigerian newspapers, eleven other notes from the country appeared in the list of the 20 largest losers.
According to a briefing, Finance Minister Zainab Ahmed indicated that the subsidy package cannot be terminated while the government transition is ongoing. The National Economic Council may recommend ending the plan soon once the new president is sworn in on May 29 or extending it past June.
Since the subsidy’s cost is not only inefficient but also unsustainable, “everybody agrees that the subsidy should be removed very quickly,” Ahmed said. That it won’t be taken down at this time guarantees that it won’t be taken down before the transition is finalized, which is what I indicated.
BusinessDay reported that after the outrage over the currency exchange charade and the suffering it caused the poor in Nigeria, removing the subsidy at this time had become a political minefield.
The finance minister has now stated that preparations for the removal of the subsidies should continue in conjunction with all relevant stakeholders, including members of the new administration led by President-Elect Bola Tinubu.
“If the committee’s work determined that the removal can be done by June, then the work plan will be designed to exit as at June,” she explained. If it is decided that the timeline needs to be pushed back, the government will have to “revisit the Appropriation Act, for example.”
Nigeria is expected to spend at least $13 billion on fuel subsidies this year, and President Muhammadu Buhari’s administration had planned to end the arrangement on June 1. The government may have to produce a supplementary budget to pay the increased expenditure, as reserves had only been set aside to cover the expense for the first six months of the year.
Spending an estimated 96% of revenues on debt service in 2022 will put Africa’s largest economy in a precarious financial position. It was hoped that eliminating the subsidies, which ate up virtually all of the revenue from oil sales, would reduce the budgetary strain.
Tinubu, who campaigned on a promise to remove the pricey payments, will now make the decision on subsidies, which Buhari is leaving up to him.
Putting off the elimination of subsidies means the administration will need to present a supplemental budget to the National Assembly so that it doesn’t run out of money.
Several observers have expressed disapproval of the statement. On several occasions, interest groups like the LCCI and economists and financiers across the country had advised the government to bite the bullet and end a subsidy regime that has significantly damaged the economy, but the government has been unwilling to do so, according to Gabriel Idahosa, the deputy president of the Lagos Chamber of Commerce and Industry (LCCI).
