Will fuel subsidy removal postponement affect Nigeria’s borrowing?

Nigeria has recently announced the suspension of the planned removal of fuel subsidies, which was originally set to take effect in June this year, for an additional 18 months. The reasoning behind this delay stems from concerns regarding the potential inflationary pressures this move could trigger within the country. This decision has raised questions about how Nigeria intends to continue funding these subsidy payments and the impact it will have on the country's borrowing plans for 2022. In a recent interview with CNBC Africa, Egie Akpata, Chairman of Skymark Partners, provided insights into the implications of this subsidy removal suspension. Akpata described the postponement as a political decision that essentially defers the inevitable challenge of funding these subsidies. The cost of maintaining these subsidies is significant, requiring the government to seek additional funds through borrowing, thereby perpetuating a cycle of financial strain. Akpata highlighted the potential ramifications on Nigeria's 2022 budget, including the need for a review due to the impact on budget deficits, which currently stand at over six trillion. With the suspension of the subsidy removal, the budget deficit is expected to increase, necessitating additional borrowing to finance the subsidy payments. The estimated amount required for the subsidies is around one trillion naira for six months, but this figure could rise with fluctuations in oil prices and exchange rates. The discussion also touched upon the borrowing options available to the Nigerian government to cover these costs. Akpata outlined various avenues, including selling national assets, seeking concessionary loans from multilateral and bilateral organizations, issuing Eurobonds, and tapping into the domestic market. The decision to approach the Eurobond market may present challenges, as market conditions have evolved, and foreign investors may be more cautious in light of global uncertainties. Regarding the domestic market, the government's increased borrowing needs could have significant implications for corporate bond issues. The heightened demand for government bonds may lead to higher yields, making it more challenging for corporate issuers to attract investors. This competition for funds could create a more challenging environment for corporate bond offerings in the near future. When discussing the risks associated with debt servicing for 2022, Akpata expressed concerns about the potential strain on government finances. The substantial debt service payments from the previous year underscore the challenges faced by Nigeria in managing its debt obligations. With the increased borrowing required to fund the fuel subsidies and other expenses, debt servicing is likely to remain a key issue for the government throughout the year. Overall, the decision to postpone the removal of fuel subsidies in Nigeria has raised significant questions about the country's economic stability and its borrowing plans for 2022. The reliance on borrowing to finance recurrent expenses like subsidies underscores the challenges faced by the Nigerian government in managing its finances effectively. As the country navigates these financial pressures, prudent fiscal management will be crucial to ensure long-term economic sustainability and stability.