In light of the electricity tariff increase, analysts have highlighted some immediate potential gains for the economy from the policy action.
They believe the reduced subsidy burden (all else equal) should support a moderation in the fiscal deficit for 2024 (budgeted: N9.2 trillion), given that revenue sources are yet to significantly improve.
“More so, allocating the N1.1 trillion that would be saved from the policy action to funding other pro-growth capital expenditure would be expedient to the current administration’s ambition of growing the economy’s Gross Domestic Product (GDP) to $1.0 trillion in four to six year from the current $535.3 billion,” said analysts at Afrinvest.
For context, the FG spent N4.9 trillion on electricity subsidies in the last 10 years, and the proposed subsidy for 2024, N1.6 trillion, is higher than budget provision for education (N1.5trn) and Health (N1.3trn).
Buttressing this point, the IMF had alluded that the high cost of electricity subsidies could impact up to 3.0 per cent of Nigeria’s 2024 GDP.
Private Investments in Power Sector: We opine that the shift to a more cost-reflective tariff would incentivise more private sector players to invest in the generation and distribution value chain of the power industry as well as boost FG’s prospect of attracting long-term bilateral and multilateral capital needed to strengthen transmission infrastructure which is solely controlled by the Transmission Company of Nigeria (TCN) on behalf of the FG.
According to a Bloomberg report, GenCos and DisCos would need N2.0 trillion capital investments to revive the sector to enable steady power supply to end users. We have already seen the listing of some GenCos on the NGX in a move that would see more investors’ interest in the power sector.
“We believe listing of more power companies would help to unlock the much-needed capital required to upscale key infrastructure across the power value chain. Currently, Nigeria generates only 4,059 MW to feed 12.0 million households out of an installed capacity of 13,097 MW.
“Nevertheless, we flagged that the negative effect of tariff hike (if not cushioned with improved power supply) could overshadow the potential gains with far-reaching consequences on SMEs and Large Corporations (especially in the Manufacturing sector).
“Organisations are still feeling the effect of the high energy costs from the fuel subsidy removal policy which saw the price of PMS rise from N189.00/litre to N650.00/litre. In a bid to keep up with margin (especially if power supply remains epileptic), we anticipate that businesses would pass on the increased energy cost burden to end users,” Afrinvest said.