The severe social discomfort and economic dislocation caused by the nationwide fuel scarcity may stampede the incoming Administration of, President-elect Muhamad Buhari to settle the outstanding invoicesof Petrol Marketers, and also accept over N200bn interest charge as penalty for delayed payments and the exchange rate differentials consequent upon the almost 20 percent recent Naira devaluation.

Some critics may suggest that the government representatives who had accepted liability for such oppressive penalty charges, would not readily make such an undertaking if they represented their own private corporations or family assets, particularly in the face of a bleeding revenue base and rapidly increasing debt burden. However, critics may suggest that the pressure to avoid the horror of fuel scarcity and a voters’ backlash before the recent elections may have stampeded the Finance Minister’s Team to make such an unwise commitment.

Nonetheless, Buhari may be forced to tow the same path of reckless financial mismanagement, if the current fuel scarcity persists to fire social angst,while petrol marketers remain adamant and insist that government should first settle alleged outstanding debts before they (marketers) commit to any fresh fuel importation.

Certainly, the retired General does not need an early confrontation with the public or indeed Labour who will as usual demand that subsidy should only be removed after sufficient local refineries are established to meet domestic consumption! However, since refineries (depending on size) have between 18-36 months gestation, this may suggest that subsidy may not be wished away very soon!

Besides, Labour and Civil Societies also recognise that if the Naira rate continues its steady plunge against the dollar,it would be foolhardy to accept deregulation, because with such depreciation, fuel prices will simultaneously continue to spiral! Conversely, Buhari’s Team may plead that it is not sensible to dedicate over 20 percent of federal budgets to subsidy and almost 50 percent of total Crude Export Revenue to consumption of imported fuel annually.

We cannot predict the length of the ensuing stalemate, but as usual, in the interest of the nation, government and Labour may once more agree to split the subsidy burden. Clearly, government’s share of subsidy will nevertheless rise if the Naira continues its downward slide or if “unfortunately”, crude oil prices rebound once again! For example, if the Naira is left to float as currently proposed by the Banker’s Committee, Naira could well exchange for over N300=$1 before the end of 2015, particularly if the instigation of systemic excess Naira remains an abiding pillar of CBN’s monetary strategy.

Invariably, with such degree of Naira depreciation, fuel prices will spiral about 50 percent above the price on which subsidy was initially calculated. Consequently, unless pump prices are adjusted upwards, government’s share of the subsidy burden will balloon back to the level, where subsidy would exceed 20 percent of annual federal budgets. In the same manner, higher crude prices will also translate to higher fuel prices and increasing subsidy values, if the cause of the excess liquidity that induces a weaker Naira exchange rate is not addressed.
Furthermore, if fiscal indiscipline persists, subsidy refunds to marketers will invariably be delayed and will accumulate as usual, until the issue of delayed payments and exchange rate differentials would surface once more to trigger fuel scarcity with the attendant painful, social and economic dislocations. 

In his attempt to end this horrendous cyclical narrative, Buhari will be well advised to recognise that subsidy will be eliminated with the current Naira exchange rate if price of crude remains below $50/barrel, so that ex-refinery cost will also be low; ironically, however, if this happens, our oil revenue base will unfortunately be depleted and speculative dollar demand would further threaten the Naira exchange rate as is currently the case. Ultimately, further Naira depreciation will inadvertently pump up fuel price and also swell the existing value of subsidy and distort the possibility of efficient resource allocation. 

Clearly, if weaker Naira rates instigate higher fuel prices which inducehigher fuel subsidy values, it stands to reason that an increasingly stronger Naira should also reduce fuel price and ultimately eliminate subsidy, so that new refineries will be established as complete deregulation of the sector gradually becomes possible. 

For example, if Naira exchanges for N100=$1, this would be a 50 percent appreciation from the current N200=$1; in this event, the current unsubsidized actual fuel price of about N150/litre will immediately fall below N80/litre, and make about N7/litre available as petrol sales tax if the current regulated price of N87/litre remains unchanged. Notably, the related sales tax potential will increase beyond N7/litre (i.e. daily inflow of almost N300m into the treasury instead of outflow from subsidy) if the Naira strengthens below N100=$1.

The million-dollar question however, is how the Naira can appreciate when oil revenue and reserves are dwindling; after all, as some experts claim, it is the size of our reserves that defines the exchange rate of the Naira! Curiously, however, in the Nigerian context, CBN builds up its dollar reserves, bycontinuously,consciously suffocating the domestic money market with surplus Naira, despite the obvious attendant adverse economic consequences.

Expectedly, with such a Naira antagonistic strategy, the Naira exchange rate will be pummeled when it is constantly pitted against the paltry dollar rations, auctioned every week by CBN from the caché of public sector dollars which were earlier captured and substituted with fresh Naira allocations at an exchange rate that is always unilaterally determined by the Apex Bank. This bizarre payments strategy, apart from instigating excess Naira, also induces the unforced error of the official liberal provision of presumably ‘scarce’ public sector dollars for the unsubstantiated forex requirements of the black market.

Instructively, however, the Naira will increasingly become stronger, if the foreign exchange component of federal allocations are paid with dollar certificates rather than the outright monthly substitution of freshNaira values which invariably precipitate the constant spectre of surplus Naira and its oppressive train of inflation, huge cost of funds, a weaker Naira as well as the higher fuel prices, which ultimately make the removal of subsidy unpopular.

Predictably, the above recommended reform in the payments systems, will gradually mop up the erstwhile unrelenting flood of surplus Naira which readily swallows the relatively meager dollar rations sold weekly by CBN; clearly, if this reform in the allocations of public sector export revenue is sustained, the Naira may still ultimately exchange below N100=$1,despite the current lower crude oil revenue, within Buhari’s first year in office. Thereafter, the Naira could also be redenominated by two decimal points to technically make Buhari’s alleged promise to make N1=$1 a reality!

Thus, Buhari will avoid a protracted social and economic dislocation, if he quickly engages Organised Labour and Civil Societies to reach a consensus to sustain partial deregulation, with government “reluctantly” conceding 50 percent of the difference between the current N87/litre and the unsubsidized current actual market price of about N150/litre; with this arrangement, the agreed pump price would be set at N120/litre excluding government’s subsidy of about N33/litre.

Nonetheless, with the recommended payments reform, the subsidy component of N33/litre would be gradually reduced and ultimately eliminated when the Naira appreciates below N100=$1 while the value of inflow from petrol sales tax may ultimately exceed N500m/day rather than a daily outflow of over N1bn as fuel subsidy!