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Nairaland Forum / Nairaland / General / Mr. President, Beware Of The Day Of Subsidy Removal (540 Views)
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Mr. President, Beware Of The Day Of Subsidy Removal by IBBG(m): 12:32pm On Jun 29, 2015 |
According to recent media reports, almost N5tn was disbursed as subsidy payment on fuel consumption between 2006 and 2012. Thus, the annual average provision of about N1tn is probably equivalent to about one fifth of the total federal budget in the same period. In effect, subsidy payments clearly exceeded the consolidated annual allocations for health, education, transport and agriculture. Worse still, the alleged benefits of subsidy are not direct or tangible as progressive drivers of social welfare. Nevertheless, the more relevant question, however, is probably what would be the result on the economy and poverty alleviation if fuel subsidy was summarily abolished and pump price of fuel rises to about N140/ litre, when crude oil price is N62/barrel and naira exchange rate is N200 per dollar? Experience has taught Nigerians to expect prices of most goods and services to head northwards as fuel price rises to induce higher transport costs which trigger an upward spiral on the general price level. Nonetheless, some Nigerians may insist that if the subsidy free price of N140/litre would eliminate the perennial problem of fuel scarcity and the attendant social stress and economic dislocation and also minimise corrupt leakages, then, so be it. “Let subsidy be removed”, they would chorus! They would also argue that if Nigerians readily paid over N200/litre during the most recent fuel scarcity, then N140/litre should be no big deal! Instructively however, Nigerians may change from this same melody if a N50/litre rise in petrol price pushes the inflation, beyond 10 per cent within six months or so from the date of subsidy removal. The prices of foodstuffs and all earners of static income will inevitably be the hardest hit. The N18,000 minimum wage earner, for example, will struggle to keep alive, and pensioners will also groan under the yoke of inflation; consumer demand will contract and industrial capacity utilisation will also further recede, while new investments may be put on hold. Clearly, such outcomes will not improve the level of employment in the country and will certainly deepen poverty nationwide notwithstanding President Muhammadu Buhari’s best efforts. Despite such a desperate social scenario, subsidy abolitionists would again counter that at least fuel supply and price will be stable and Nigerians do not have to waste the whole day searching for petrol. Besides, it is assumed that once price control is eliminated, more investors will establish new refineries and the resultant competition will bring down prices. However, the expectation for lower prices may regrettably never materialise if the experience of diesel price deregulation is anything to go by. Despite deregulation, diesel currently sells well above petrol, and there is nothing to suggest that petrol price will fall if subsidy is also abolished from the pricing template. Furthermore, private refineries for diesel have yet to surface! Besides, it is also uncertain how long the deregulated market price of N140/litre, will hold, particularly if the naira further depreciates. Indeed, a close look at the relationship between fuel price and exchange rate, clearly suggests that over the years fuel price will rise whenever the naira depreciates, even if crude oil prices remain static or fall. This correlation between fuel price and naira exchange rate is clearly demonstrated in the recent past, when a “lowly” crude price of about $60/barrel (down from over N100/barrel) instigated a subsidy free price of about N140/barrel; the unexpected price rise was clearly the result of the fall in value of the naira from less than N160/$ to almost N200/$. Indeed, a drop in crude oil price below $60/barrel will not bring fuel price below N140/litre. For example, if in response to market pressure, the naira further depreciates over time to say N300=$1, the deregulated pump price of fuel will spiral well above N200/litre! The inevitable public resistance to such higher fuel price will temporally stall supply from marketers, scarcity will persist and long queues will surface as usual, while fuel will sell on the black market for over N400/litre, and the usual pain resulting from the attendant social and economic dislocation will prevail once again. Ultimately, as in the past, the public will succumb and accept what is clearly a more “benign” price of N200/ litre, with the expectation that adequate supply will become available to once again reduce their sufferings. Incidentally, the higher subsidy free fuel price also comes with the collateral of spiralling inflation, which will again threaten the purchasing value of the naira. Expectedly, if the systemic burden of surplus naira in the economy also subsists, and pressure on the naira remains untamed, further naira devaluation will become inevitable. In such an event, the naira could subsequently exchange for between N250 and N300=$1. Thus, even if crude price remains low, deregulated pump price will still rise if the naira exchange rate further depreciates. Sadly, this cycle of inflation, devaluation, higher fuel price and more devaluation will become endless with disastrous social and economic consequences. Clearly, efforts to alleviate poverty or jumpstart agricultural or industrial growth will fail in such a disenabling environment. This phenomenon has been replicated in several African countries, notably, Ghana and Zimbabwe. In the case of Ghana, the Cedi collapsed ultimately from less than two Cedis=$1 to over 10,000 Cedis =$1. Consequently, about seven years ago, the Ghanaian currency was redenominated by four decimal points to one new Ghana Cedi=$1.1. Regrettably however, the cause of the sliding currency was not identified and the vicious cycle of depreciation remained unbroken and today almost four new Ghana Cedis exchange for $1, or more graphically expressed as 40,000 Old Ghana Cedis=$1. Don’t let anyone tell you it cannot happen in Nigeria; indeed, no one would have believed that the naira which once exchanged for 50 kobo=$1 will today exchange on the black market for over N220/$1, yet the pressure on the naira remains unabated. The current N20 gap between official and parallel market naira exchange rate will certainly increase with the Central Bank of Nigeria’s exclusion of importers of rice and some 39 other commodities from official foreign exchange window. Ultimately, the increasing margin between official and black market rates will encourage malfeasance, as witnessed over the years in the foreign exchange market. In order to facetiously “save” the naira, the CBN would respond by raising the official exchange rate closer to the rates in the parallel market. This reaction would inadvertently induce higher fuel prices and push inflation to ultimately threaten the capacity of the CBN to achieve its prime mandate for price stability. The outcome of such failure would be reflected as double digit inflation rates, higher cost of funds to the real sector and an even weaker naira exchange rate. The combination of these indices will further contract consumer demand, stifle investment and promote a higher level of unemployment as poverty rapidly deepens nationwide. Instructively, the solution to eliminating fuel subsidy without tears will actually be found in a more sensible process of managing naira supply to induce a stronger naira exchange rate. For example, if the naira exchanged for N100=$1, the “subsidy free” price of fuel will fall below N70/litre, so that a minimum sales tax of N17/litre can be imposed on each of the 40 million litres of petrol consumed daily, if the pump price remains at N87/litre. Meanwhile, such a stronger naira exchange rate will gradually evolve if dollar denominated revenue is not substituted with fresh creations of naira values as monthly allocations to the tiers of government. www.punchng.com/opinion/viewpoint/mr-president-beware-of-the-day-of-subsidy-removal/ |
Re: Mr. President, Beware Of The Day Of Subsidy Removal by Papasmal(m): 12:40pm On Jun 29, 2015 |
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