The Impact of Ad Valorem Tariff on Nigeria’s Petroleum Sector
The introduction of a 15% ad valorem tariff on imported petrol and diesel by the Nigerian government has sparked significant debate. This decision, which aims to support local refineries and stabilize fuel prices, is seen as a strategic move to foster economic growth and reduce dependency on foreign imports. However, it also raises questions about potential crony capitalism and the balance between protecting domestic industries and maintaining affordability for consumers.
Ad valorem tax, derived from the Latin phrase "ad valorem" meaning "according to value," is traditionally associated with real estate, where property values are assessed using a Best of Judgment template. While this method is not commonly applied in other sectors, its adoption for petroleum products signals a shift in policy that could have far-reaching implications.
Zach Adedeji, who proposed the idea to President Bola Tinubu, argues that the tariff will encourage the development of local refineries, ensure price stability, and strengthen the naira. This aligns with broader goals of economic self-sufficiency and resilience against global market fluctuations.
Aliko Dangote, CEO of the Dangote Group, has remained relatively quiet on the matter, but his Chief Branding and Communications Officer, Tony Chiejina, has publicly endorsed the government's decision. Chiejina highlighted the refinery's achievements, including daily production of 45 million litres of petrol and 25 million litres of diesel. He emphasized the refinery's commitment to efficient nationwide delivery and collaboration with regulatory agencies.
Experts suggest that the Dangote Refinery could save Nigeria over $12 billion annually in foreign exchange while creating thousands of jobs. This potential economic boost underscores the importance of supporting local industries through strategic policies like the ad valorem tariff.
The tariff is expected to protect domestic refineries from unfair competition, ensuring they can thrive in a competitive market. It also serves as a signal to investors that Nigeria is open to opportunities in the downstream petroleum sector. The Dangote Refinery’s plan to expand its processing capacity to 1.4 million barrels per day by 2028 further highlights the potential for growth and investment.
Bayo Ogunlesi, Chairman of Global Infrastructure Group, noted that Nigeria is a vast gas province, suggesting that the country has significant untapped resources. While he did not explicitly state plans to establish a refinery, his comments reflect the potential for future investments in the energy sector.
Dangote must maintain consistency in his commitments to avoid repeating the missteps of previous administrations. The failure of the NNPC to operate its refineries effectively has left many Nigerians skeptical. However, the Dangote Refinery’s successful operation in 2024 offers hope for a more reliable and efficient petroleum sector.
Despite delays in the planned initial public offering (IPO) of Dangote Refinery shares, the company continues to generate interest among institutional investors. The potential listing on the Nigerian Exchange Limited could bring much-needed transparency and accountability, ensuring that the company operates in the best interests of shareholders and the nation.
If the IPO proceeds, it could democratize ownership of Nigeria’s downstream petroleum sector, allowing citizens to benefit from the country’s natural resources. This would mark a significant shift from the monopolistic practices of previous state-owned enterprises like the NNPC and NNPCL.
The success of the Dangote Refinery also raises questions about the need for similar strategies in other sectors. For instance, imposing tariffs on imported textiles could help revive Nigeria’s once-thriving textile industry, which was a major employer before government policies led to its decline.
The fragility of the Nigerian textile industry was evident when Western economies withdrew their support following the turmoil under General Sani Abacha’s regime. This highlights the importance of stable governance and supportive policies for industrial growth.
Imposing tariffs on strategic sectors like textiles, food processing, and petroleum refining can protect domestic industries and promote long-term economic development. This approach mirrors the strategies used by countries like the United States, where tariffs have been employed to safeguard national interests.
In addition to tariffs, the government must address other critical areas such as electricity supply, steel production, railway expansion, and agricultural development. These sectors are essential for building a resilient and diversified economy.
By implementing comprehensive policies that support local industries and infrastructure, Nigeria can position itself for sustainable growth and economic independence. The ad valorem tariff on imported fuels is just one step in this broader strategy, but it represents a crucial move toward a more self-reliant and prosperous nation.