According to recent media reports, almost N5tn was disbursed as subsidy payment on fuel consumption between 2006-2012? Thus, the annual average provision of about N1tn is probably equivalent to about one fifth of total annual federal budget in the same period. In effect, subsidy payments clearly exceeded the consolidated annual allocations for health, education, transport and agriculture every year.
Worse still, the alleged benefits of subsidy are not direct or tangible as progressive drivers of social welfare. Nevertheless, the more relevant question, however, is probably what would be the result on the economy and poverty alleviation if fuel subsidy was summarily abolished and pump price of fuel rises to about N140/litre, when crude oil price is about N62/barrel and Naira exchange rate is N200/$.
Experience has taught Nigerians to expect the prices of most goods and services to head northwards as fuel price rises to induce higher transport cost which trigger an upward spiral on the general price level.
Nonetheless, some Nigerians may insist that if the higher price of N140/litre would eliminate the perennial problem of fuel scarcity and the attendant social stress and economic dislocation and minimise corrupt leakages, then, so be it, “let subsidy be removed”, they would chorus! After all, they would also argue that if Nigerians readily paid over N200/litre during the most recent fuel scarcity, then N140/litre should be no big deal!
Instructively however, Nigerians may change from this same melody if a N50/litre rise in petrol price pushes the rate of inflation, beyond 10% within six months or so from the date of subsidy removal. Inevitably, the prices of foodstuffs and all earners of static income would probably be hardest hit.
The N18,000 minimum wage earner, for example, would struggle to keep alive, and pensioners would also groan under the yoke of inflation; consumer demand would contract and industrial capacity utilisation would also further recede, while new investments may be put on hold; clearly, such outcomes will not improve the level of employment in the country and will certainly deepen poverty nationwide.
Despite such a desperate social scenario, subsidy abolitionists would counter that at least fuel supply and price will be stable and Nigerians do not have to spend the whole day searching for petrol.
Besides, it is assumed that once price control is eliminated, more investors would establish new refineries and the resultant competition will bring down prices; notwithstanding, the reality, of course, is that the expectation for lower prices may regrettably never materialise if the experience of diesel price deregulation is anything to go by; diesel currently sell well above petrol despite its deregulation, and there is nothing to suggest that the price of petrol would fall if subsidy was also abolished from PMS (petrol) pricing.
Besides, it is also uncertain how long the deregulated market price of N140/litre, would hold, particularly if the Naira exchange rate suffers further depreciation. This correlation between fuel price and Naira exchange rate is clearly demonstrated in the recent past, when a ‘lowly’ crude price of about $60/barrel (down from over N100/barrel) instigated actual market petrol price of about N140/barrel; the unexpected price rise was clearly the result of the fall in value of the Naira from less than N160/$ to almost N200/$.
Indeed, even if crude price further slides below $60/barrel, petrol price will still rise well above the subsidy free price of N140/litre. For example, if in response to market pressure, the Naira further depreciates to say N300=$1, the deregulated pump price of fuel may still spiral well above N200/litre!
The inevitable public resistance to a higher fuel price will temporally stall supply from marketers, scarcity will persist and long queues will surface once more, while fuel will sell on the black market for over N400/litre, and the usual pain from the resulting social and economic dislocation would prevail once again. Ultimately, as in the past, the public will succumb and accept what is clearly the more ‘benign’ price of N200/litre, with the expectation that adequate supply will become available to once again reduce their sufferings.
Incidentally, the higher fuel price also comes with the collateral of spiraling inflation, which will threaten the purchasing value of the Naira; ironically, if the systemic burden of surplus Naira in the economy also subsists, further Naira devaluation would become inevitable. In such event, the Naira could subsequently exchange for between N250-N300=$1. Thus, even if crude price remains low, domestic pump price will still rise if the Naira exchange rate further depreciates.
Sadly, this cycle of inflation, devaluation, higher fuel price and more devaluation would become endless with disastrous social and economic consequences; clearly, efforts to alleviate poverty or jumpstart agricultural or industrial growth would fail in such a disenabling environment. This phenomenon has been replicated in several African countries, notably, Ghana and Zimbabwe.
Don’t let anyone tell you it cannot happen in Nigeria; indeed no one would have believed that the Naira which once exchanged for 50 kobo=$1 will today exchange on the black market for over N220/$1, yet the pressure on the Naira remains unabated. In any event, the current 10% gap between official and parallel market exchange rate of the Naira will certainly widen with CBN’s exclusion of importers of rice and some forty other commodities from official foreign exchange window.
Ultimately, the increasing margin between official and black market rates will encourage malfeasance, as witnessed over the years in the foreign exchange market; in order, to “save” the Naira, the CBN would respond by raising the official exchange rate closer to the rates in the parallel market, this reaction would inadvertently induce higher fuel prices, and ultimately threaten the capacity of the CBN to achieve its prime mandate for price stability.
The outcome of such failure would be reflected as double digit inflation rates, higher cost of funds to the real sector and an even weaker Naira exchange rate; the combination of these indices will contract consumer demand, stifle investment and promote a higher level of unemployment as poverty deepens nationwide.
Instructively, the solution to rising fuel price will actually be found in a more sensible process of managing money supply to induce a stronger Naira exchange rate. For example, if the Naira exchanged for N100=$1, the “subsidy free” price of fuel will fall below N70/litre, so that a minimum sales tax of N17/litre can be imposed on each of the 40million litres of petrol consumed daily in this country, if market price remains at the current price of N87/litre.
Meanwhile, such a stronger Naira exchange rate would gradually evolve if dollar denominated revenue is not substituted with fresh creations of Naira values as monthly allocations to the tiers of government.
Save the Naira, Save Nigerians!!
VANGUARD
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