Bad news for Nigeria’s economy as energy price inflation may persist

Doubts in Europe have pushed up energy prices, and Nigeria may be forced to deal with high food inflation and inflated prices for diesel and other unsubsidized energy imports for a while.

Specifically, Russia is a significant supplier of energy products, thus western sanctions imposed on Russia in response to its onslaught on Ukraine are impacting the availability of supplies. Consequently spreading the adverse effects of the ongoing war to other countries such as Nigeria.

From a European perspective, due to low inventory and the relatively high dependence on Russia for energy needs, the sanctions on Russian oil imports (including diesel fuel), have resulted in a sharp supply dislocation such that analysts have warned that some European governments such as the UK may need to resort to diesel fuel rationing as early as next month. You can read more here from DailyMailUK and from OilPrice.

Nigeria, although being a global oil producer, is still heavily reliant on imported oil. Nigeria’s fuel imports are currently 128% greater than they were in 2020.

A diesel supply shortfall has the potential to be far more catastrophic given the ubiquitous demand for diesel in all aspects of Nigeria’s economic activity.

Specifically, many Nigerian businesses rely significantly on diesel-powered generators for daily operations. Thus, exorbitant spikes in diesel prices and/or shortage will result in higher operating costs for the generators that power business equipment such as machinery, computers, mobile phone towers, etc.

The value of Energy goods imports was 507.38% in Q4 2021, higher than in Q3 2021 and 124.10% higher than the value recorded in Q4 2020 while the value of energy goods imports was 86.19% higher in 2021 than the value recorded in 2020.

Therefore, for Nigerians, the dual threat of potential disruption to business operations, as well as, the imminent threat to food inflation spiraling out of control may simply be too much to bear.

From a policy perspective, we are yet to see any meaningful action being taken by the governments to alleviate these headwinds.

This is despite other countries already taking actions such as reviewing taxes to offer tax breaks where possible to alleviate the burden on their citizens and providing cost of living adjustments.