The Federal Government is aiming to remove subsidies on domestic fuel prices within six months after investing in a mass transit system to ease the impact on the people, Finance Minister, Olusegun Aganga, has said.

“It is going to be sooner rather than later,” Aganga told Bloomberg  in an interview in London on Friday. “It is difficult to give a date, but I would hope within six months.”

The subsidies will cost the government N520 billion ($3.4 billion) this year, compared with N1 Trillion in 2009, Central Bank governor, Lamido Sanusi, estimated in June. That compares with a federal budget deficit of N1.9 trillion this year, which Aganga said he wanted to narrow in 2011.

The abolition of the subsidy would increase petroleum prices to between N115 and N120 a litre from N64 currently, Aganga said. “If that happened, it would be a big shock to the system,” he said.

Nigeria, Africa’s biggest oil producer, imports more than 80 per cent of its domestic fuel due to a lack of refining capacity, according to the country’s Petroleum Ministry. The government, through the Nigerian National Petroleum Corporation (NNPC), guarantees regulated fuel prices by paying importers the difference with market prices.

About N10 billion has been earmarked to improve public transportation and many buses have already been ordered, Aganga said.

The government is also in talks with the labour unions to gain their support and avoid social unrest, he said. “I think we are making very good progress in the talks,” he added.

“Everyone accepts that there is no economic sense in maintaining subsidies,” Aganga said, adding that “the question is, what would be the impact of subsidy removal on those that you want to protect, the most vulnerable in the society?”

He also said he wanted Nigeria to start a sovereign wealth fund in October, dedicating most of the money to investment in infrastructure.

“We have just recently had a beauty parade by all the legal and investment advisers who are keen to assist,” Aganga said, “Within the next day or two, we will be appointing the advisers.”

The fund will replace the excess crude oil account, which the government has often used to finance expenditure, Aganga said. Part of the new fund will be dedicated to savings that the government can’t touch unless oil prices plummet, while most will finance the construction of roads, railways and ports, in cooperation with private investors, he said.