A COMPUTABLE GENERAL EQUILIBRIUM ANALYSIS OF THE IMPACT OF DOMESTIC NATURAL GAS MARKET LIBERALISATION POLICY ON MACROECONOMIC AND HOUSEHOLD WELFARE IN NIGERIA

Abstract

The growth in domestic demand for natural gas and the need to promote market efficiency gave rise to the call for gas sector liberalisation in Nigeria. As of 2017, only about 12% of total natural gas produced in Nigeria were available for domestic consumption, an indication of the underdeveloped domestic gas market. Most studies on gas market liberalisation in Nigeria using the Computable General Equilibrium (CGE) model focused on gas price without examining the economy-wide and household welfare impact of the liberalisation policy. This study, therefore, extends this front by examining the impact of gas price, as well as a third party access policy to natural gas infrastructures on the macroeconomic, sectoral and household welfare in Nigeria.

A recursive-dynamic CGE model, based on the Walrasian theory of market behaviour, and a transhipment optimisation model was used for the study. The model accounted for product and price effects, making it possible to capture the macroeconomic, sectoral and household welfare impact of natural gas market liberalisation policy in Nigeria. The model included production, income and savings, demand, international trade, prices, equilibrium, and dynamic blocks. It was calibrated using data sourced from the modified 2014 Nigerian Social Accounting Matrix (SAM). In the SAM, households were categorised into Rural Core-Poor (RCP), Rural Moderate-Poor (RMP), Rural Non-Poor (RNP), Urban Core-Poor (UCP), Urban Moderate-Poor (UMP) and Urban Non-Poor (UNP) according to 2010 Harmonized Nigerian Living Standard Survey. Capital stocks were considered using investment, while labour supply and the minimum consumption of households were adjusted each period by the population growth rate in order to capture the dynamic adjustment path. The model was simulated for a gradual 10% increment in market liberalisation over a ten-year horizon (2015 - 2025). The transhipment optimisation model was used to analyse the impact of third party access policy.

The simulation scenario exerted negative effects on GDP by 0.74% for the first year, a positive effect of 0.43% for the tenth year; positive effects on inflation, government revenue and investment expenditure by 0.45%, 1.26%, and 1.04% respectively. The simulation scenario precipitated a decline in household welfare at the onset of the policy by 0.26% (RNP), 0.43% (RMP), 0.65 (RCP), 0.32% (UNP), 0.48% (UMP), 0.52% (UCP). However, this was reversed in the tenth year as household welfare increased by 1.27% (RNP), 0.94% (RMP), 0.04 (RCP), 2.18% (UNP), 1.04% (UMP), and 0.06% (UCP) respectively. The transhipment optimisation simulation shows an increase in total market supply (90.27%), gas producers' revenue (141.23%), and gas facility company's revenue (20.73) if the third party policy is utilised.

Domestic natural gas market liberalisation and third-party access policy in Nigeria have favourable long-run impact on macroeconomic, sectoral and household welfare. However, some social safety net measures to ameliorate the envisaged short-run adverse effects are recommended.