According to recent media reports, almost N5tn was
disbursed as subsidy payment on fuel consumption
between 2006 and 2012. Thus, the annual average
provision of about N1tn is probably equivalent to about
one fifth of the total federal budget in the same period.
In effect, subsidy payments clearly exceeded the
consolidated annual allocations for health, education,
transport and agriculture.
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 N62/barrel and naira
exchange rate is N200 per dollar?
Experience has taught Nigerians to expect prices of most
goods and services to head northwards as fuel price
rises to induce higher transport costs which trigger an
upward spiral on the general price level.
Nonetheless, some Nigerians may insist that if the
subsidy free price of N140/litre would eliminate the
perennial problem of fuel scarcity and the attendant
social stress and economic dislocation and also minimise
corrupt leakages, then, so be it. “Let subsidy be
removed”, they would chorus! 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
inflation, beyond 10 per cent within six months or so
from the date of subsidy removal. The prices of
foodstuffs and all earners of static income will inevitably
be the hardest hit. The N18,000 minimum wage earner,
for example, will struggle to keep alive, and pensioners
will also groan under the yoke of inflation; consumer
demand will contract and industrial capacity utilisation
will 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 notwithstanding President
Muhammadu Buhari’s best efforts.
Despite such a desperate social scenario, subsidy
abolitionists would again counter that at least fuel supply
and price will be stable and Nigerians do not have to
waste the whole day searching for petrol. Besides, it is
assumed that once price control is eliminated, more
investors will establish new refineries and the resultant
competition will bring down prices. However, the
expectation for lower prices may regrettably never
materialise if the experience of diesel price deregulation
is anything to go by. Despite deregulation, diesel
currently sells well above petrol, and there is nothing to
suggest that petrol price will fall if subsidy is also
abolished from the pricing template. Furthermore,
private refineries for diesel have yet to surface!
Besides, it is also uncertain how long the deregulated
market price of N140/litre, will hold, particularly if the
naira further depreciates. Indeed, a close look at the
relationship between fuel price and exchange rate,
clearly suggests that over the years fuel price will rise
whenever the naira depreciates, even if crude oil prices
remain static or fall.
This correlation between fuel price and naira exchange
rate is clearly demonstrated in the recent past, when a
“lowly” crude price of about $60/barrel (down from over
N100/barrel) instigated a subsidy free price of about
N140/barrel; the unexpected price rise was clearly the
result of the fall in value of the naira from less than
N160/$ to almost N200/$. Indeed, a drop in crude oil
price below $60/barrel will not bring fuel price below
N140/litre. For example, if in response to market
pressure, the naira further depreciates over time to say
N300=$1, the deregulated pump price of fuel will spiral
well above N200/litre!
The inevitable public resistance to such higher fuel price
will temporally stall supply from marketers, scarcity will
persist and long queues will surface as usual, while fuel
will sell on the black market for over N400/litre, and the
usual pain resulting from the attendant social and
economic dislocation will prevail once again.
Ultimately, as in the past, the public will succumb and
accept what is clearly a more “benign” price of N200/
litre, with the expectation that adequate supply will
become available to once again reduce their sufferings.
Incidentally, the higher subsidy free fuel price also
comes with the collateral of spiralling inflation, which will
again threaten the purchasing value of the naira.
Expectedly, if the systemic burden of surplus naira in the
economy also subsists, and pressure on the naira
remains untamed, further naira devaluation will become
inevitable. In such an event, the naira could
subsequently exchange for between N250 and N300=$1.
Thus, even if crude price remains low, deregulated pump
price will still rise if the naira exchange rate further
depreciates. Sadly, this cycle of inflation, devaluation,
higher fuel price and more devaluation will become
endless with disastrous social and economic
consequences. Clearly, efforts to alleviate poverty or
jumpstart agricultural or industrial growth will fail in such
a disenabling environment. This phenomenon has been
replicated in several African countries, notably, Ghana
and Zimbabwe. In the case of Ghana, the Cedi collapsed
ultimately from less than two Cedis=$1 to over 10,000
Cedis =$1. Consequently, about seven years ago, the
Ghanaian currency was redenominated by four decimal
points to one new Ghana Cedi=$1.1. Regrettably
however, the cause of the sliding currency was not
identified and the vicious cycle of depreciation remained
unbroken and today almost four new Ghana Cedis
exchange for $1, or more graphically expressed as
40,000 Old Ghana Cedis=$1.
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.
The current N20 gap between official and parallel market
naira exchange rate will certainly increase with the
Central Bank of Nigeria’s exclusion of importers of rice
and some 39 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 facetiously “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 push inflation to 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 further contract
consumer demand, stifle investment and promote a
higher level of unemployment as poverty rapidly deepens
nationwide.
Instructively, the solution to eliminating fuel subsidy
without tears will actually be found in a more sensible
process of managing naira 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 40 million litres
of petrol consumed daily, if the pump price remains at
N87/litre.
Meanwhile, such a stronger naira exchange rate will
gradually evolve if dollar denominated revenue is not
substituted with fresh creations of naira values as
monthly allocations to the tiers of government.
www.punchng.com/opinion/viewpoint/mr-president-beware-of-the-day-of-subsidy-removal/

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