23

Mar

THE AVOIDABLE OPPRESSIVE BURDEN OF FUEL SUBSIDY 18112013

2013-11-18

THE AVOIDABLE OPPRESSIVE BURDEN OF FUEL SUBSIDY
By Les Leba

The social trauma induced by the unexpected fuel price hike of January 1, 2012 seems to have put further discussions on appropriate pricing of Premium Motor Spirit (PMS) in the cooler.  Meanwhile, government's attempt to cleanse the Augean stable of fuel subsidy scams seems to have had little or no effect on the humongous value of subsidy paid to oil marketers!

Incidentally, at a recent hearing of the Senate Joint Committee on Appropriation, the Finance Minister, Dr. Ngozi Okonjo-Iweala, reported that about N1.4tn had been expended on subsidy payments this year.  According to the minister, this amount excludes subsidies paid for kerosene imports, which Mr. Dakuku Peterside, the Chairman Committee on Petroleum, also recently confirmed to be in excess of N634bn for  the last three years.  

Furthermore, tens of billions of naira still remain outstanding to oil marketers, while the subsidy claims for October to December are also not yet accounted for.  In other words, ultimately, about N2tn may be expended as fuel subsidy in 2013.

The dismal comparison is that inexplicably, only about N1.5tn was allocated for infrastructure and capital development in the 2013 budget.

Meanwhile, the 2014/2016 Medium Term Expenditure framework is not quite explicit on the projected subsidy payments in government's fiscal strategy for the next three years.  In any event, there is nothing to suggest that fuel subsidy payments would fall below the estimated 2013 burden of about N2tn.  In other words, Nigerians may not witness any significant improvement in capital and infrastructure enhancement in the next three years.  

In reality, the choices we make individually or collectively ultimately determine what we become; the question, therefore, is, how far and how fast can we grow if we continuously devote over 40% of our annual budget to fuel subsidy payments?

There is, therefore, an urgent need to re-examine our fiscal and monetary strategy and evolve much more responsible ways of dealing with the issue of wasteful subsidy payment, and its impact on critical infrastructural deprivation and deepening poverty nationwide.

Regrettably, in spite of public resistance to any fuel price hike, the government's management team seems incapable of formulating a policy that would eliminate fuel subsidy!

For the rest of this article, we will consider alternative strategies for removing the oppressive burden of subsidy in our fiscal strategy.  

Let's first take a look at the issue of kerosene usage and pricing.  In the belief that higher kerosene prices impact adversely on the income of the masses, government subsidy on kerosene is considerably higher than PMS.  Regrettably, however, government's expectation seems to have been misplaced as kerosene sells in the open market at over N120 per litre in place of the subsidized price of N50 per litre.

Worse still, it is worrisome that government's attention appears rivetted in promoting kerosene as a source of domestic fuel, when, in fact, our relatively cheap and extensive gas reserves are recklessly flared off with damaging consequences on climate, and severe health hazards for host communities of gas reserves.

The amount of N634bn apparently spent on kerosene subsidy in the last three years, would most certainly have funded gas pipelines to some, if not all of our major urban areas.  

Furthermore, existing petrol stations could be configured to also dispense gas for domestic use; ultimately, as is the case in industrialized countries, all homes can be connected to enjoy the supply of clean and cheap gas for domestic use.  

Indeed, government needs to urgently partner or encourage private investment in the domestic manufacture of cheap and durable gas stoves for possibly free distribution to as many households as possible.  Such a strategy would help to conserve our forests, and also reduce the horrendous accidents from the use of adulterated kerosene.  This would appear to be a more sensible approach to supporting the needs of the poor than the disenabling challenges of kerosene subsidy, and the minimal impact on the lives of the poor.

Indeed, it would not be out of place, if government took the bold step of insisting that every vehicle imported into Nigeria henceforth should also be compatible for gas application.  

In similar vein, gas supply could also be rapidly made accessible for use in power plant nationwide.  In this manner, our erstwhile largely wasted and hazardous gas reserves will be productively harnessed.  
  
The alternative strategy for the abolition of subsidy on petrol is probably much simpler.  I have maintained for several years that fuel subsidy payments are induced by a misguided exchange rate mechanism.  For example, the weaker the naira rate of exchange, the greater will be subsidy payments annually.  

Thus, if international FOB market price of PMS is, for example, $1, then, by extension, this would be equivalent to N160 per litre!  On the other hand, if the naira exchange rate falls to N200 per dollar, while official pump price remains at N97, this would imply that, the naira subsidy component will increase.  

Conversely, if the naira exchange rate strengthens to N80 per dollar, for example, this implies that PMS would similarly sell at N80 per litre plus freight and clearing charges; i.e. well below the current official price of N97 per litre.  Thus, the government may earn close to N14 per litre as a sales tax, rather than pay subsidy of about N40 per litre.

However,  the obvious question would be, how do we strengthen the value of the naira, when we do not produce anything other than oil?  

The answer, of course, is that an export-oriented multicultural economy will bring in the same foreign exchange that a thriving, very successful monocultural economy will provide!!  The problem with dollar revenue derived from crude oil is the unfortunate manipulation of exchange rate in favour of the dollar by the  CBN’s misguided substitution of naira allocations for dollar-derived revenue; this is the albatross in our economic system, as the ensuing excess naira liquidity places the naira at a disadvantage in the foreign exchange market, in which the same CBN rations dollar supply!! 

SAVE THE NAIRA, SAVE NIGERIANS!!