How petrol discount may cost Nigeria N1.77trn, threaten naira

Nigeria’s petrol price relief package could cost the Federal Government up to N1.77trn, or 0.4 per cent of Gross Domestic Product, with prolonged implementation threatening government revenue, foreign exchange stability and investor confidence.

BMI, a Fitch Solutions company, gave the projection in its latest report, titled Fuel Discount Mechanism Raises Macro Risks in Nigeria, warning that the intervention could worsen the country’s fiscal position if it extends beyond its planned timeline.

The research firm estimated that the package could cost between 0.2 and 0.4 per cent of GDP, assuming the measures are withdrawn in late first quarter or early second quarter of 2027.

Using Nigeria’s 2025 nominal GDP of approximately N441.5trn, the projected cost translates to between N883bn and N1.77trn. The naira estimates are indicative calculations based on BMI’s GDP projections.

The warning comes amid concerns about rising fiscal pressures ahead of the 2027 general elections, with BMI projecting that Nigeria’s budget deficit could widen from 1.7 per cent of GDP in 2025 to 3.3 per cent in 2026.

The intervention followed the October 8 announcement by the Minister of Finance, Taiwo Oyedele, of a 30-day relief measure requiring Nigerian National Petroleum Company Limited retail outlets to sell petrol without earning profit margins.

The government also proposed a wholesale petrol price benchmark of N1,350 per litre, under which refiners and importers would absorb costs above the threshold and recover their losses when crude oil prices decline.

Other measures include forward crude sales to domestic refineries, the establishment of a national strategic fuel reserve, expanded cash transfers and additional support for vulnerable households.

Despite the government’s initial 30-day timeline, BMI expects the discount mechanism to remain in place for approximately six months, potentially extending into early 2027.

The firm said the projected duration partly reflects expectations that global crude oil prices could decline following a possible agreement between the United States and Iran in the first quarter of 2027.

BMI acknowledged that the current arrangement differs from Nigeria’s former petrol subsidy regime, under which the government absorbed the difference between regulated pump prices and market costs.

Under the new mechanism, NNPC Retail sacrifices its retail profit margin while pump prices are expected to reflect underlying market costs.

However, the firm warned that the arrangement could create fresh economic imbalances if it becomes permanent.

“We see significant macroeconomic risks if the NNPC fuel discount mechanism is not removed and instead becomes entrenched,” the report stated.

BMI warned that prolonged implementation could reduce NNPC’s remittances to government accounts, leaving fewer resources for infrastructure, public services and security.

It added that declining fiscal credibility could raise government borrowing costs and increase pressure on debt servicing, while reduced retail margins could discourage investment in the downstream petroleum sector.

The report also highlighted potential foreign exchange risks, warning that cheaper petrol in Nigeria could encourage cross-border smuggling if domestic prices fall significantly below those in neighbouring countries.

Increased smuggling, it said, could raise fuel import requirements and demand for foreign exchange, potentially worsening dollar shortages and putting renewed pressure on the naira.

BMI further cautioned that fears of a reversal of economic reforms could discourage foreign portfolio investors, reducing an important source of dollar inflows.

The intervention could also affect the Dangote Refinery and its planned initial public offering, as increased government involvement in petroleum pricing may undermine investor confidence.

According to the firm, requiring suppliers to sell fuel at cost without a clear mechanism for recovering forgone profits could weaken profitability and encourage refiners to prioritise exports over domestic supplies.

BMI, however, described the proposed forward sale of crude oil to domestic refineries as a more promising approach to improving local fuel supply, despite previous implementation challenges.

Meanwhile, the Federal Government has insisted that the petrol discount does not amount to a return of fuel subsidy, maintaining that no public funds are being used to lower prices at NNPC retail outlets.

The government said the relief was funded through NNPC Retail Limited’s decision to reduce its retail profit margin, rather than payments from the federal budget or the Federation Account.