It is ironical that despite the raging public debate on whether or not to sustain the regime of fuel price subsidy, our government may have, regrettably, once more, inadvertently doubled the existing N50/litre subsidy. The Petroleum Product Pricing Regulatory Agency’s template indicates that as at June/July 2015, the “subsidy free” price of petrol hovered around N140/litre; thus, the regulated pump price of N87/litre, implies that motorists currently pay over N50/litre less than the actual recovery price.
This shortfall adds up to almost N2bn every day, from the estimated 40 million litres petrol consumption. Consequently, subsidy may exceed N700bn annually and account for over 15% of the austere N4.5Tn 2015 budget. This bloated expenditure on fuel subsidy alone is certainly worrisome, particularly when the consolidated revenue allocations to key sectors such as education, health and transport fall below N800bn.
The advocates for subsidy removal, therefore argue that its abolition would additionally provide almost N1tn for the execution of more socially productive programmes; furthermore, in addition to the expected savings from its abolition, fuel supply will also become more stable and the social agony from endless searches and extended queues at petrol stations will be eliminated.
Subsidy critics also express confidence that deregulation would engender keen competition amongst marketers, and produce lower pump prices, even though, this expectation is yet to become manifest in the already open market for diesel. Conversely, pro-subsidy advocates argue that abolition would invariably trigger a significant rise in transport cost which will in turn propel prices of virtually all goods and services;
ultimately, annual inflation rate would exceed 10%, such that every 5years, all incomes would lose over 50% of purchasing power and jeopardize the value of static incomes and expectations of pensioners; furthermore, inflation would reduce consumer demand and adversely affect industrial capacity utilization and investment decisions and further worsen the already high rate of unemployment.
Additionally, pro-subsidy advocates allege that the Naira exchange rate would further depreciate and inadvertently spur the cost of fuel well above the erstwhile deregulated price of N140/litre, if the spiral of inflation triggered by subsidy abolition remains unchecked. Thus, if the Naira exchange rate, for example, suffers a 10% depreciation, the strong inverse relationship between Naira exchange rate and fuel prices, would invariably drive fuel price above N150/litre without subsidy.
Consequently, if, official dollar exchange rate rises by, say, 25% from the current N200 to above N250, an unending cycle of inflation and depreciating Naira will again catapult fuel price from the erstwhile subsidy-free price of N140 to about N170/litre.
Unfortunately, N170/litre petrol price would in turn engender another spiral on transportation cost with the inevitable adverse collateral impact on the general price level so that the resultant weaker Naira exchange rate, would once more spur a fresh hike that may ultimately shoot petrol price closer to N200/litre. Clearly, if this obnoxious cycle remains unbroken, the unsubsidized price of petrol will steadily approach N500/litre as correctly recognized by President Muhammadu Buhari in the course of an interview on his recent trip to the United States.
This poisonous cycle of weaker Naira rates and higher fuel prices will sadly be consistently repeated, so long as the excess Naira which primarily remains in the custody of commercial banks continues to drive inflation. Regrettably, the monetary authorities, have so far, appeared helpless in checking this phenomenon of Naira liquidity for over two decades.
Instructively, however, continuous Naira depreciation is evidently the result of the same unyielding surplus Naira which is constantly pitched against rations of dollar auctions in the forex market. This paradigm is clearly a self destructive process which ironically, richly supplements CBN’s ‘reserves’ while, it regrettably, simultaneously suffocates the money market with unbridled credit surplus, despite the attendant anti people consequences of such Naira liquidity on inflation, consumer demand and cost of funds to the real sector.
Nonetheless, advocates of subsidy removal would clearly be incensed if subsidy payments beyond current budget estimates further increased for whatever reason. However, the rapidly widening gap of almost N50 between the officially sourced and open market dollar exchange rates may have ‘quietly unnoticed’ doubled the actual subsidy of N50 to almost N100/litre on the existing N87/litre fuel price.
In other words, subsidy payments from the federation account may have risen beyond N4bn from the erstwhile value of N2bn daily. Consequently, presently, consolidated subsidy estimates (including kerosene) may clearly approach N2Trillion annually. In a related development, the CBN recently banned access to cheaper official forex to importers of 41 different materials and components. The objective of the ban was supposedly to protect CBN’s rapidly depleting reserves.
Nevertheless, the choice of items banned from official forex access has aroused sharp controversy; indeed critics contend that since fuel imports account for almost 50% of all forex usage, it is clearly inappropriate that fuel importers were not excluded from sourcing cheaper forex supply from CBN, especially when one of the primary objectives for exclusion was to encourage local production.
It is also inexplicable that, while importers of the 41 items on the list are required to source their forex from the open market, other imports, including petrol, would continue to enjoy a cheaper, call it subsidized, Naira exchange rate of N200 instead of the current open market price of N245/$ for their orders.
Thus, in an odd twist of strategy, if fuel price remains subsidized at N87/litre, the additional provision of cheaper official forex supply to petrol importers, will, surely, further deplete government revenue by almost N100/litre and consolidate revenue leakage of about N2Trillion annually i.e. over 40% of the 2015 federal budget from fuel subsidy.
Conversely, if fuel imports were settled with the open market price of N250/$, indeed, rather than suffer reduction, government revenue would obviously increase by almost N1Trillion or $5bn annually, if fuel price remained unchanged at N87/litre while crude oil remains stable around $60/barrel.
Clearly, these huge subsidy payments would be rightly decried as a profligate fiscal strategy, when millions of Nigerians live below the poverty threshold of $2/day. Nevertheless, although the above narrative clearly advises that outright abolition of subsidy would infact be counterproductive if surplus Naira liquidity persists, however, a stronger Naira exchange rate will certainly eliminate subsidy without tears.
Instructively, Naira exchange rate will never appreciate with the constant presence of excess Naira liquidity in the commercial banks; however, the allocation of the federation’s dollar derived revenue with dollar certificates will gradually, painlessly and benignly remove subsidy without the usual poisonous distortions to the critical monetary indices that challenge inclusive economic growth and constrain the creation of increasing job opportunities.
SAVE THE NAIRA, SAVE NIGERIANS
VANGUARD
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