It is ironical that despite the raging public debate on whether or not to sustain a regulated fuel price regime, our government may have, regrettably, once more, inadvertently doubled the existing N50/litre subsidy. 

The Petroleum Product Pricing Regulatory Agency’s template indicates that as at June/July 2015, the “subsidy free” market price of petrol hovered around N140/litre; thus, the regulated pump price of N87/litre, implies that motorists currently pay over N50/litre less than the actual recovery price. This shortfall adds up to almost N2bn every day, from the estimated 40 million litres of petrol consumption. Consequently, subsidy may exceed N700bn annually and thus account for over 15 percent of the rather austere N4.5Tn 2015 budget. This bloated expenditure on fuel subsidy alone is certainly worrisome, particularly when the consolidated revenue allocations to key sectors such as education, health and transport fall below N800bn.
The advocates for subsidy removal, therefore argue that its abolition would additionally provide almost N1tn for the execution of more socially productive programmes; furthermore, apart from the expected savings from subsidy removal, fuel supply is expected to become more stable while the social agony from endless searches and extended queues at petrol stations will be eliminated. Subsidy critics also express confidence that deregulation would engender keen competition amongst marketers, and produce lower pump prices, even though, this expectation is yet to become apparent in the already open market for diesel.

Conversely, pro-subsidy advocates argue that abolition would invariably trigger a significant rise in transport cost which will in turn propel prices of virtually all goods and services; ultimately, annual inflation rate would exceed 10 percent, such that every 5years, all incomes would lose over 50 percent of purchasing power and jeopardize the value of static incomes and the livelihood of pensioners; furthermore, inflation would expectedly reduce consumer demand, increase production cost and adversely affect industrial capacity utilization and investment decisions while the already high rate of unemployment will become worse.

Additionally, pro-subsidy advocates allege that if the inflationary spiral triggered by subsidy abolition remains unchecked, the Naira exchange rate would further depreciate and inadvertently spur the cost of fuel well above the erstwhile deregulated price of N140/litre. Thus, if the Naira rate, for example, suffers a 10 percent depreciation, the strong inverse relationship between Naira exchange rate and fuel prices, would invariably drive fuel price above N150/litre without subsidy. 

Similarly, if, official dollar exchange rate rises by, say, 25 percent from the current N200 to above N250, an unending cycle of inflation and sliding Naira will again catapult fuel price from the erstwhile subsidy-free price of N140 to about N170/litre. Unfortunately, petrol price at N170/litre would in turn engender another spiral on cost of transportation with the inevitable collateral adverse impact on the general price level so that the resultant weaker Naira exchange rate, would once more spur a fresh hike that may ultimately shoot petrol price closer to N200/litre. Clearly, if this obnoxious cycle remains unbroken, the unsubsidized price of petrol will steadily approach N500/litre as correctly recognized by President Muhammadu Buhari in the course of an interview during his recent trip to the United States.

So long as the unbridled excess Naira stock which remains primarily in the custody of commercial banks continues to drive inflation, this poisonous cycle of weaker Naira rates and higher fuel prices will sadly be consistently repeated. Regrettably, however, the monetary authorities, have so far, appeared helpless in checking this explosive phenomenon of Naira liquidity for over two decades.

Instructively, however, the same unyielding surplus Naira which is constantly pitched against rations of dollar auctions in the forex market remains the major cause of persistent depreciation of our currency. This market paradigm is clearly a self destructive process which ironically, richly supplements CBN’s ‘reserves’ while, it regrettably, simultaneously suffocates the money market with untamed credit surplus, with the attendant anti-people consequences of such Naira liquidity on inflation, consumer demand and cost of funds to the real sector.

Nonetheless, advocates of subsidy removal would clearly be incensed if subsidy values were to increase significantly beyond current budget estimates for whatever reason.

However, the present rapidly widening gap of almost N50 between officially sourced and open market dollar exchange rates may have ‘quietly unnoticed’ doubled the existing subsidy of N50 to almost N100/litre if fuel price remains at N87/litre. In other words, subsidy payments from the federation account may have risen beyond N4bn from the erstwhile N2bn daily outflow. Consequently, consolidated subsidy estimates (including kerosene) may now approach N2000bn annually.

In a related development, the CBN recently banned access to cheaper official forex to importers of 41 different materials and components. The objective of the ban was supposedly to protect CBN’s rapidly depleting self styled, ‘own reserves’.
Nevertheless, the choice of items banned from official forex access has aroused wide controversy. It is inexplicable that, while importers of the 41 delisted items are required to source their forex from the open market, other imports, including petrol, would continue to enjoy a cheaper, call it subsidized, Naira exchange rate of N200 instead of the current open market price of N245/$ for their orders. Indeed critics contend that since fuel imports account for almost 50 percent of all forex usage, it is clearly inappropriate that fuel importers were not also excluded from sourcing cheaper forex supply through CBN, especially when the other primary objective for denying access to cheaper dollars was to encourage local production. 

Conversely, if fuel import bills were settled with the open market price of N245/$, indeed, rather than suffer reduction, government revenue would obviously increase by almost N1Trillion or $5bn annually, so long as fuel price is unchanged at the regulated price of N87/litre while crude oil remains stable around $60/barrel.
Curiously, in an odd twist of strategy, if fuel price remains at N87/litre with the existing N50/litre subsidy, the provision of cheaper official forex supply to petrol importers, will, surely, further deplete government revenue by an additional N50/litre to produce a consolidated fuel subsidy bill of about N2Trillion annually i.e. over 40 percent of the 2015 federal budget. Sadly, with the present austere budget in place, we may need to borrow with extremely high interest rates to fund our subsidy obligations!

Clearly, N2000bn annual subsidy payments would be rightly decried as a profligate fiscal strategy, when millions of Nigerians live below the poverty threshold of $2/day.

Nevertheless, although the above narrative clearly suggests that outright abolition of subsidy would infact be counterproductive as long as surplus Naira liquidity persists, however, a stronger Naira exchange rate will gradually eliminate subsidy without tears. For example, fuel price will steadily fall below the regulated price of N87/litre, if Naira exchange rate strengthens to N100/$. In such event, a minimum 10 percent sales tax can be imposed on each of the 40 million litres of petrol sold daily. However, Naira exchange rate will never appreciate with the constant presence of excess Naira liquidity in the custody of the commercial banks; instructively, the adoption of dollar certificates for allocation of the federation’s dollar derived revenue will, painlessly and benignly, gradually remove subsidy from petrol price without the usual poisonous distortions to the critical monetary indices that challenge inclusive economic growth and constrain the creation of increasing job opportunities.