23

Mar

LABOUR, SUBSIDY AND ECONOMIC DYSFUNCTION 27102014

2014-10-27

LABOUR, SUBSIDY AND ECONOMIC DYSFUNCTION
BY HENRY BOYO

The feelers from snippets of information so far available from the 2014-15 budget projections clearly suggest that, inspite of dwindling revenue due to prevailing lower crude oil prices and output, Nigerians may still be compelled to dedicate almost N1500bn or over 20% of next year’s federal budget to the intangible and unsubstantiated benefit of subsidising fuel consumption nationwide. 

Alarmingly, the annual allocation for fuel subsidy has often exceeded the consolidated provision for infrastructure and human capacity enhancement for all federal Ministries, departments and Agencies. Evidently, since the beneficent impact of such relatively meagre capital vote was barely noticeable in 2014, we may confidently also project that the social and economic welfare of the masses may similarly see little or no improvement come December 2015.
 
Furthermore, it has also become acutely glaring that so long as such wasteful management of our resources continues, we will have to take government’s promises of rapid and vibrant economic growth and job creation with a pinch of salt, especially when CBN’s inappropriate strategy of high monetary policy rates and its attendant money market credit squeeze, which clearly constrains enterprise, remains abiding.

Nevertheless, inspite of the foreclosed recognition of the potential failure of government’s extant fiscal and monetary policy strategy, the January, 2012 pro-subsidy mass demonstrations may have also intimidated the authorities and forestalled any attempt to redeem our economy by terminating the recklessness and wastefulness of further payment of subsidy on petrol and kerosene, so that the current, relatively meagre capital allocations could become doubled in value to rapidly ameliorate our severe infrastructural deprivations particularly in the areas of education, health, transportation and power.
Although Labour’s opposition to fuel subsidy removal may suggest an anti-economic growth posturing, such perspective may be grossly incorrect!  Labour, is without a doubt, evidently sincere in its apprehension that price deregulation will not bring down fuel prices and stem inflation with salutary impact on all income earners, including that of its members, as per government’s promises!  Labour rightly recognizes that although the concept of deregulation is ideal, and should normally provide the required level playing field, but Nigerians have also learnt from experience to be wary of such government assurances.  In this particular instance, Organised Labour intuitively knows even if they cannot place their finger on the missing link, that something is amiss in the overt, simple equation of deregulation = lower prices and better services!  Expectedly, local fuel prices should rise whenever crude oil prices rise, but Labour cannot yet see what government has put in place to stem this sympathetic relationship between rising crude and local petrol prices; not even deregulation, as presently construed, has the capacity to change this framework; nonetheless, it is inexplicable also that domestic fuel prices never fall even when crude prices tumble, as is currently the case.

Certainly, an end to NNPC’s monopoly and the adoption of a market determined price regime will certainly attract more competitively imported fuel as well as serious investors in the establishment of additional private refineries; but, it would however be inappropriate to supply our crude oil to such refineries at a price below prevailing world market price for the commodity.  Any attempt to do this would be akin to reintroduction of subsidy through the backdoor!  Indeed, the potential abuses of such a system may create a bigger hole in our pockets than the erstwhile trillions of Naira allegedly paid as subsidy to fuel importers in the present regulated market.  

In the light of the above, Labour’s insistence that the four existing refineries be retooled to produce at full capacity and that more refineries be also built, is therefore obviously not the easy answer to fuel subsidy removal.  Yes, more refineries may ultimately facilitate fuel availability, but this may not necessarily bring down prices, especially when international crude oil prices rise.  Indeed, it is curious that in spite of Labour’s awareness of the hundreds of millions of dollars ‘wasted’ on failed turnaround and other maintenance projects in the existing four refineries, Labour should inexplicably still insist that more good money be further wasted on refurbishment as we have done over the years!  Surely, the intention of Labour is certainly not to encourage and sustain corruption and mismanagement of public funds, but the truth is that Labour is perplexed on how to put its best foot forward without becoming a victim of its own advocacy with regard to deregulation.

Regrettably, however, despite the obvious debilitating burden of fuel subsidy on our economy, government is unlikely to even want to broach any issue with Labour on this ‘albatross’ because their popularity and victory in the 2015 General elections may be jeopardised.

However, an early recognition of the increasing millions of Nigerian who have become, clearly, socially desperate, may suggest, that even after the elections have come and gone, it would still remain a daunting task for government to persuade the public to accept over 50 percent increase on the current purchase price of N97/litre; the knock-on effect of such a price rise would most certainly push the rate of inflation back into double digits and seriously challenge any effort of the Central Bank to achieve its core mandate of price stability. Inflation which is a silent plague will ultimately severely constrain demand and deplete the purchasing power of all income earners, particularly the poor.
So if neither refurbishment nor new refineries will ultimately bring down or stabilise fuel prices so that subsidies become inapplicable, how, then can government jettison these wasteful and retrogressive subsidy payments so that the related savings can be applied more wisely to the enhancement of the social welfare of our people?

Indeed, how do other oil producing countries, not only, avoid such subsidy payments, but actually also earn a sales tax on each litre of fuel sold? In truth, rising crude prices should normally increase fuel prices worldwide, but in the peculiar case of our country, the major driver of fuel price seems to actually be the inappropriately priced Naira.
Thus, if for example, the f.o.b. price of 1 litre of fuel is $1, then of course, this would translate to about N160/litre in Nigeria (with Naira exchange rate of $1=N160), exclusive of freight charges of between 5-10 percent. In the same manner, if the Naira weakens to N200=$1, expectedly, fuel will sell locally for N200/litre plus freight and port charges. If on the other hand, the Naira exchange rate strengthens to N80=$1, (with stable crude oil prices), then of course, 1 litre of fuel would sell for N80/litre, which is well below the current subsidised price of N97/litre. Indeed, our government could thus save the payment of over N1.5tn subsidy and similarly levy a sales tax of up to 10 percent or more on each litre of fuel sold.

Fortunately, as regularly advocated in this column, the Naira rate of exchange will ultimately become stronger and make fuel subsidy removal painless once the CBN stops the compulsive substitution of dollar revenue with freshly created Naira allocations. This practice ultimately poisons any attempt to achieve inclusive economic growth.

SAVE THE NAIRA,SAVE NIGERIANS!!