As Nigeria Grapples with Fuel Subsidy Removal, Saudi Spends $7,000 Per Person, Highest in G-20 Economies

•Citi says naira worst performing currency in 2023

Emmanuel Addeh in Abuja

Saudi Arabia’s total spending on fuel subsidies soared over the past two years, hitting the highest among the Group of 20 economies on a per capita basis, a Bloomberg report has shown.

The revelation is coming amid the harsh impact of petrol subsidy removal by the Bola Tinubu administration, which has cited the unsustainable nature of the decades-long payments. In 2022, Nigeria spent about $10 billion for the purpose.

The report indicated that Saudi Arabia spent almost $7,000 per person, equivalent to about 27 per cent of economic output, across both explicit and implicit energy subsidies, according to a paper published by the International Monetary Fund (IMF).

Fossil fuel subsidies soared globally since 2020 to $7 trillion last year as governments took measures to protect consumers and businesses from a spike in prices following Russia’s invasion of Ukraine, according to the IMF paper.

 It estimated that cutting fossil fuel subsidies could help reduce carbon dioxide emissions, deaths from air pollution and boost government revenues.

“Fossil fuels in most countries are priced incorrectly,” Simon Black, Antung Liu, Ian Parry and Nate Vernon wrote in the IMF working paper. “Unfortunately, current prices are routinely set at levels that do not adequately reflect environmental damages and, in some cases, not even supply costs,” they added.

China-which spent $2.2 trillion – was the biggest provider of subsidies in absolute terms, followed by the US and Russia, according to the IMF. Saudi Arabia spent a total of $253 billion on subsidies last year, it added.

The IMF has been urging Saudi Arabia to push ahead with measures to cut the government subsidy bill and take steps to protect the welfare of low-income households through increased and targeted social spending. The spending has made Saudi fuel one of the cheapest in the world.

In 2021, the government set a cap for the domestic cost of gasoline to soften the impact of higher living costs on citizens, just months before prices soared to over $100 a barrel.

In its Article IV Consultation last year, the IMF said that the kingdom’s work on subsidy reforms is “continuing unabated through planned step price increases that will lead to their elimination by 2030.”

Implicit subsidies, which the IMF defined as undercharging for the environmental cost of fossil fuel burning and lost tax revenue, made up the bulk of the global total. Explicit subsidies, or selling fuels as below supply costs, had a share of just 18 per cent.

Meanwhile Citigroup has said that Nigeria, Angola and Kenya are among African countries that could draw greater foreign investment flows in the wake of sharp declines this year for their currencies.

“Countries where we’ve seen significant FX adjustments are clear winners from an investment perspective,” George Asante, Citi’s head of markets for Sub-Saharan Africa, said in an interview in Nairobi. “All these from a local market perspective offer opportunities, ” he told Bloomberg.

Nigeria’s naira is the worst-performing African currency this year, it said, slumping more than 40 per cent against the dollar as the country takes painful steps to patch up its finances by scrapping fuel subsidies and revamping a widely-criticised exchange-rate system. Angola’s kwanza is down 39 per cent and the Kenyan shilling nearly 15 per cent, it added.

Nigerian President, Bola Tinubu, is seeking to retool the economy by scrapping fuel subsidies in place since the 1970s and diverting the money spent on them to increased investment in health services, schools and job creation. In June, the central bank overhauled the nation’s exchange-rate policies, effectively devaluing the naira.

The removal of subsidies was a “very important reform” for Nigeria, while moves to merge multiple exchange rates will also help to boost liquidity, Asante said. The next task for the government is to make sure the official FX market can function smoothly in the wake of the changes, he said.

“I believe that this will be a significant catalyst for flows back into the Nigerian market,” Asante noted.

Commenting on the prospects for eurobond issuance by African nations, “darlings of the market” including Ivory Coast and Senegal will probably attract most interest from investors when the market reopens, he said. Both countries have long-term foreign debt ratings of Ba3 from Moody’s Investors Service.

“These two countries have fairly consistent high growth rates, diversified economic bases, large IMF programmes with associated concessional financing and a track record for economic reforms and fiscal prudence as well as low cost of debt service,” Asante said.

As the coronavirus pandemic eased, some African countries started to seek infrastructure financing, primarily for energy and food-related projects and longer-term investment in roads, railways and hospitals, said Ferdinand Zaumu‎, Citigroup’s head of trade and working capital solutions in the Middle East and Africa.

“A lot of that infrastructure financing is really to solve some of the issues that came out of Covid,” Zaumu said. “The one big shift that we have seen is that the Chinese have slowed down in terms of providing financing for a lot of these infrastructure and we’ve seen a pick up from the west.”

African countries with the most financial leeway to seek infrastructure financing include Uganda, Tanzania, Rwanda, Namibia, Botswana and Mauritius, he said.