More Factories, And Businesses May Shut Down As Diesel Hits N1,100/litre

• Increasing diesel prices, rising crude oil costs, and an unstable power grid exacerbate economic challenges. • Inflation and unemployment rates may rise as gas prices increase. • NECA calls on the government to eliminate VAT on diesel and PMS. • Nigerians urged to consider carpooling, electric vehicles, and public transit as alternatives.

There are growing concerns that more manufacturing companies and businesses in Nigeria could cease operations in the coming months due to an ongoing energy crisis. Diesel prices have soared to over N1,100 per liter, further compounding the challenges faced by the manufacturing sector. This dire situation is exacerbated by a foreign exchange crisis, a fluctuating national currency, and decreasing purchasing power. Additionally, the prices of alternative energy sources like Liquified Petroleum Gas (LPG) and Compressed Natural Gas (CNG) may continue to rise.

The Nigerian Association of Liquefied Petroleum Gas Marketers has predicted that the price of a 12.5kg cooking gas cylinder could increase to N18,000 from its current price of N10,000.

The frequent shutdown of factories due to power shortages and unfavorable economic conditions remains a major concern. Without prompt action, such as the removal of taxes on petroleum products, the manufacturing sector may experience job losses and reduced revenue contributions to the nation’s Gross Domestic Product (GDP).

The Central Bank of Nigeria’s Naira redesign policy has exacerbated the crisis, leading to a 17.3 percent increase in production and distribution costs for manufacturers in the second quarter of the year. Various sectors, including manufacturing, have been affected by high credit costs, insufficient access to loans, multiple taxes, inconsistent tax policies, raw material shortages, delayed importation of raw materials, high raw material prices, forex scarcity, unfavorable exchange rates, and poor forex allocation.

The unreliable electricity grid has hindered manufacturing activities, with over 134 system collapses in the past decade. Manufacturers have spent nearly N1 trillion in the last seven years to source alternative energy, with expenditure increasing each year.

The consistent closure of manufacturing companies has resulted in over 4,451 job losses each year in the manufacturing sector alone. Factory output value decreased from N3.73 trillion in the first quarter of the year to N2.68 trillion in the first quarter of 2022.

As crude oil prices approach $100 per barrel, businesses in Nigeria are expected to face even tougher times. Despite these challenges, Nigeria’s actual electricity output remains at approximately 3500 megawatts.

Stakeholders have called on the government to take immediate action to address these issues, including reducing the cost of governance, cutting government spending, creating policies that encourage production, improving power supply, eliminating corruption, and fostering an enabling environment for industries to thrive.

The rising diesel prices will also result in higher transport costs for goods and services, affecting household items and commodities. Stakeholders advise Nigerians to explore alternative transportation methods, such as carpooling, electric vehicles, and public transit, to mitigate the impact of the price hike.

The Nigeria Employers’ Consultative Association (NECA) has urged the government to remove the 7.5 percent Value Added Tax (VAT) on diesel and Premium Motor Spirit (PMS) to help moderate fuel price increases. Stakeholders suggest that individuals and households explore fuel-efficient vehicles, carpooling, and public transit options to reduce transportation costs and contribute to a greener transportation system.

The increase in diesel prices will impact both households and businesses, potentially leading to cutbacks on non-essential expenditures and limiting access to vital services. Stakeholders emphasize the need for cost-effective, sustainable, and inclusive alternatives to mitigate the impact on household finances and overall well-being.

The Director-General of NECA highlighted the challenges faced by local industries that rely on diesel for power generation, especially given the unreliable and expensive national electricity supply. The government is urged to denominate gas prices in Naira, incentivize private investment in gas aggregation, and revitalize national refineries. Despite the removal of fuel subsidies, diesel prices have continued to rise, affecting transporters, industries, and households.

In the short to medium term, stakeholders suggest pricing gas in Naira and, in the long term, promoting private investment in gas aggregation and revitalizing national refineries. While diesel prices have remained high since the end of fuel subsidies in 2023, the removal of the subsidy has resulted in a nearly 25 percent increase in diesel prices, aligning with economic principles as PMS and diesel are close substitutes.