THE OPPRESSIVE FOLLY OF FUEL SUBSIDY
By: Sir Henry Olujimi Boyo (Les Leba), first published in May 2015
Last week, we republished “Save the Naira Save Nigerians,” which was an article that discussed events that spurred the practice of Naira devaluation. It discussed the role of the CBN to ensure the creation and implementation of policies that will serve to combat poverty, and it proceeded to highlight concerns, questioning the actual course of action repetitively taken by the CBN. If you missed this article, it can be found using the link below.
(See www.betternaijanow.com for this series and more articles by the Late Sir Henry Boyo)
Last week, the Vanguard published an article by Obas Esiedesa titled “Petrol Subsidy Removal Not Immediate- FG”. This article discussed the deregulation of the oil sector and made note of the anticipated hardship this will bring. It made mention of an implementation framework that will serve to alleviate the suffering induced by this decision. In light of this event, it was necessary to republish today’s article titled “The Oppressive Folly of Fuel Subsidy” which was initially published in May 2015. This article discusses the misplacement of priorities on the part of the Nigerian government, as well as increasing subsidy values over the years. It discusses the consequences of abolishing subsidies ‘without consideration’ to current crude oil prices and exchange rates- factors that are interlinked.
As we read the below article, kindly note the disparity between the current rates and the rates in this article’s initial year of publication (2015). ………………………………………………………………………………………………
The data released on fuel subsidy outlays from responsible Agencies of government have, over time, regrettably remained divergent, such that, it has become a challenge to obtain definitive estimates. Nevertheless, the former Finance Minister, Dr. Ngozi Okonjo-Iweala recently explained that the inconsistent figures often quoted were unavoidable because subsidy payments are a continuous, rolling process, therefore, relevant government agencies could only provide specific data relating to approved claims that have passed through each department at any point in time.
The above notwithstanding, what is clear, however, is that we are spending a disproportionate amount of our Federal budget to fund subsidy payments, which add up to about N500bn, or an average of about 10% of annual Federal budgets since 2011. Incidentally, despite the obvious severe social deprivations caused by our dismal infrastructural deficit, critical sectors such as Education and Health, were never so favoured.
Well, if you are already concerned at the apparent misplacement of priorities, then you may be alarmed, that actual subsidy values may have exceeded 20% of total Federal budgets in recent years. This is because, in addition to the N500bn or so average actual subsidy payments annually, the value of unsettled bills may approach or indeed exceed another N500bn annually.
In fact, according to the Co-ordinating Minister, subsidy values, which were never captured in annual appropriation bills, have nevertheless been settled ultimately by her Ministry without recourse to Legislative approval as constitutionally required. Why the National Assembly condoned this blatant violation of annual fiscal Acts, despite the unauthorised monstrous outflows involved, is not clear.
This tradition of impunity has obviously been stepped up with possibly, over N200bn additional commitment which was recklessly incurred this year without Legislative consent as the penalty for bank interest on delayed payments and exchange rate differentials on a ‘core’ subsidy bill of N40bn according to Thomas Olawore, the Executive Secretary of the Major Petroleum Marketers (see the report titled: Daily Subsidy on PMS rises to N1.7bnon Pg. 38 on Punch newspaper edition of 30th of April, 2015).
Clearly, if this bizarre fiscal trajectory continues, cumulative fuel subsidy values may ultimately exceed 50% of annual budgets, particularly if crude oil prices remain above $60/barrel and or the Naira exchange rate depreciates above the current N197=$; eventually, the oppressive folly of government’s subsidy strategy may become so embarrassingly glaring when we become constrained to obtain high priced loans to fund our debilitating subsidy habit.
Conversely, if the subsidy is abolished under the prevailing crude oil price and Naira exchange rate, fuel price will rapidly shoot up to about N150/litre, ultimately pushing the average price index for goods and services closer to 10%. Consequently, unless all wages and salaries rise by 10% annually, income earners may lose 50% of the purchasing value of their Naira incomes every five years; thus, more Nigerians will need to cut down on their families’ standard shopping list, as incomes increasingly lose purchasing power and deepen poverty, particularly for those families who depend on the existing minimum wage of N18000/month.
Furthermore, consumer demand will contract if inflation spirals to create adverse consequences for manufacturers and other employers of labour who will become compelled to scale down on their workforce; clearly, this will further worsen the already socially disturbing rate of unemployment.
Thus, the government may seem to be caught between the devil and the blue sea, on this matter of subsidy. Indeed, if the government’s response to this persistent dilemma remains pedestrian, as usual, the incoming administration would predictably seek a truce with OrganisedLabour to once again share the burden of subsidy, by raising the current fuel price of N87 to about N120/litre instead of a subsidy-free actual market price of about N150/litre.
Regrettably, however, this arrangement will collapse as soon as crude oil prices rise above the current $60/barrel and, or the Naira exchange rate rises above N197/$, as such price movements will push deregulated petrol price well beyond N150/litre to create a wider margin of subsidy than the N30/litre earlier projected.
Furthermore, if CBN’s rapidly depleting reserves increase pressure on dollar demand, the Naira exchange rate would simultaneously spiral closer to or above the current black-market rate of N220=$. In such event, fuel prices will rise and related subsidy values will again increase to precipitate the usual train of inadequate funding, delayed payments, etc., etc. until a brokered resolution between government and Labour once again sets in motion another cycle of folly with an agreement for partial subsidy in fuel pricing.
Sadly, it is not generally known that almost 50% of our forex earnings are currently repatriated abroad as payment for imports for the 40m litres of fuel consumed daily.
Conversely, a huge reduction in external payments may be possible, if more refineries are built or if at least the existing government’s refineries become fully operational. Nonetheless, the reality is that even at full capacity, existing refineries may provide barely 20% of national requirements; besides, Turn Around Maintenance for these refineries may characteristically still take forever to complete. However, even if refineries operate at optimal capacity, the ex-refinery cost of fuel will not be significantly different from the f.o.b. prices invoiced by the overseas suppliers; clearly, the price gain from deduction of freight and local charges may not exceed 10% off the domestic pump price in a fully deregulated market, unless crude oil is allocated to refineries at a heavy discount (another subsidy through the back door)!
Consequently, if crude oil prices rise significantly or the Naira exchange rate further depreciates, fuel pump prices will faithfully spiral uncomfortably to make the accommodation of subsidy inevitable. Besides, until price imposition is abolished, investors will continue to stay away from establishing new domestic refineries because of the clear challenges related to the payments system of the present subsidy scheme. However, savvy investors, such as Dangote, who establish new refineries, would hedge their investments by selling their products strictly in dollars ex-refinery gate to marketers who would still need to source the required forex for their purchases. In such an event, the forex outlay for fuel will remain substantial despite the new private refineries established.
Conversely, however, owners of domestic refineries would readily price their fuel in Naira if the Naira re-establishes a reputation as a safe store of value, rather than a currency that is perennially beleaguered and remains on life support. Instructively, the Naira exchange rate will continue its slide and make the abolition of subsidy a challenge so long as our domestic money market remains eternally flush with ever-surplus Naira deliberately instigated by CBN every month to chase the rationed dollar supplies from the same Apex Bank!
Save the Naira, Save Nigerians!