Impact of subsidy removal on foreign exchange –Naira will be Stronger.

Facts

1. Subsidy removal will not impact on international price of crude oil.
2. Volume of crude oil exports will not be influenced.
3. By inference, government revenue from crude exports will remain same.

Questions

• What % of total Forex demand is used by the oil sector? 18% as at 2010, an increase by 23% from the previous year.

• Will demand for petrol imports increase or reduce?

Answers

1. It is an established fact that a huge chunk of the subsidized petrol ends up in neighboring countries through smuggling.
2. By implication of subsidy removal, the gap between the price of petrol in Nigeria and neighboring countries will be narrowed thereby discouraging further smuggling
3. Absence of smuggling will translate to reduced demand for foreign exchange.
4. Genuine demand for LC viz-a-viz demand for forex will also drop in the likely consequence that fuel consumption will reduce. This follows from the logic that higher price will translate into lower demand.
5. Overall, in view of an expected constant supply, a reduction in demand for foreign exchange will translate to a drop in price.
6. A stronger Naira will translate to a reduction in inflation because Nigeria has a high propensity for Importation.
7. As the naira becomes stronger, the price of imported petrol will drop.

Lagbaja, I am sorry to say that almost all your answers are based on ceteris paribus, but in Nigeria all things are never equal. Only Yar Adua have ever reduced price of fuel, and Naira is not getting stronger anytime soon, not with so much importations by all and every sectors of economy.

@Remii You cant rule out the fact that the unusual pressure on forex demand is traceable to the activities of the petrol importers.

^^^ The question to ask is, what % of forex demand is accounted for by demand for the petroleum products in question and what % of that arises as a result of false demand (smuggling)? Are they really significant enough to affect the value of the naira? Perhaps you should pause and start dealing with actual figures before daydreaming.

Let's also keep in mind behavioural economics and the tendency for Nigerians to move like sheep.

Transport prices have gone up today, these include diesel powered vehicles, reflecting Nigerians tendency to move enbloc. Once transport and other things go up then you immediately have increased pressure on prices. Will CBN increase the supply of Naira?

SLS has already warned inflation is coming, though he thinks prices will increase by only 2% from 10.5% to 12.5%. Are travellers facing only a 2% increase in transport today? The govt has a fight on its hands to keep down inflation and by connection a stable FX rate band.

At the end of the day the market will determine the price and I can already see the price band increasing from N163 - N165 to USD1 and moving to something worse. A disciplined govt and CBN can stop inflation but I remain unconvinced.

^^^ Add to all those the fact that prices of two major staples; rice and wheat are due to increase in the coming days and months as a total ban on rice imports comes into force around March while tariff on Wheat was due to rise this week, then you'd know the budget inflation estimate of 10% was overly conservative.

Initial price increases of transportation and consumer goods are emotional responses. Over time, equilibrium price will be attained. Transport as percentage of production is less than 10% for most of our goods. Dont forget that the long distance vehicles that brings agric produce from the north and east are powered with diesel.

Fuel and the cost of petrol is a huge price driver in Nigeria. Historically prices have jumped following an increase in petrol prices.

PDP is using Nigeria as an economics experiment. If factors and actions remain as they are today please call up this thread in July 2012 and let's see where the exchange rate is then.

@Lagbaja, Very insightful posts you have here. The FG has made a bold move that will help stabilize our economy in a number of ways. People were bound to react the way they did. The accompanying "emotional outpour" is inevitable. Every policy has its pros and cons. Of course people will not like the cons especially as the pros are mainly on the macro scale.

lagbaja:

Over time, equilibrium price will be attained. 

The usual Long run - Short run analysis huh? Ever heard the quote 'in the LONG RUN we'd all be dead'? so who's the long run benefit for?
The garri I eat does not come from the North, they come from the southern hinterland and are brought to the cities by women sitting atop their sacks in the back of pick - up trucks, if you want to strike the poor in this country, there's no better way to do so than hit the price of garri. While there are redemptive measures that can be put in place to remedy the situation, i'm yet to see anyone out there willing to do so. The general consensus seems to be; let them suffer, in the LONG RUN everything will pan out. I hope we make it that far!

@Wesley

Exactly on point. You cannot use secondary school or undergrad textbk when real world prices are determined by real world market factors.

Along the supply chain you have production inputs, manufacturer inputs and retailer inputs - all dependent on fuel.

You then add in the fuel input costs of middlemen - many in Nigeria and then take account of "corruption" cost of doing business and this gives a huge upward pressure on prices.

But economics is not an exact science so the best way to find out is by 20-20 hindsight.  Let's call up this thread again in July and see where FX is, assuming GEJ doesn't blink and leaves everything the way it is today.

mama Basira really understand all this o!!

1.   It is an established fact that a huge chunk of the subsidized petrol ends up in neighboring countries through smuggling.

it's also safe to say the people vote in govt to bring smugglers to book; what has been done about these smugglers? nothing


From the subsidy debate; Importers charge for demurrage without actually proving it: what has been done about this : Nothing

#Trust#

Government is the Cabal

lets think of this- the govt has closed one source of high demend on fx. but this is the productive aspect. what of the non- productive ones like our high demand for foreign products, payment of school fees(a report said Nigerians paid around 150 billion naira to ghana in 2011) thats almst the same amount allocated to power in 2011. not to talk of other countries of the word.We also have the issue of round trippin in the fx market. these r other things that increases the demand for dollar and always leads to dis equilibrum.

The govt has not closed a source of high demand.

The "cabal" will still demand their pound in flesh. It is just that "we the people" will pay instead of via the Govt. Imported oil will still be paid for in US$. If our refineries are fixed or demand for imported oil falls then the impact would be lessened.

Analysis is full of holes.

1. Contrary to the anecdotes, smuggling is a small part of this whole story, so you are counting phantom savings that doesn't exist.

2. Counting the reduction in fuel consumption due to the more than doubling of the price of fuel is like a FATHER COUNTING HIS SAVINGS FROM REDUCING THE FEEDING OF HIS HOUSEHOLD FROM 3 MEALS A DAY TO ONE. That is senseless. Actual reductions in fuel demand mean actual reductions in the welfare of the average Nigerian, and at the end of the day of the economy as a whole. GEJ likes to say our economy is growing at 7%, but without palliative measures look that to drop to 4-5% this year.

3. If other countries join in increasing prices which reduces demand for petrol then the reduction in crude oil might cause the price of oil to go down by a couple of dollars. That translates to a real loss of revenue for Nigeria.

E le i ti a lai mo'kan fi n'se ara e lo po ju i.e. the injury to self is the biggest result of ignorance.

lagbaja:

Impact of subsidy removal on foreign exchange –Naira will be Stronger.

Facts

1. Subsidy removal will not impact on international price of crude oil.
2. Volume of crude oil exports will not be influenced.
3. By inference, government revenue from crude exports will remain same.

Questions

• What % of total Forex demand is used by the oil sector? 18% as at 2010, an increase by 23% from the previous year.

• Will demand for petrol imports increase or reduce?

Answers

1. It is an established fact that a huge chunk of the subsidized petrol ends up in neighboring countries through smuggling.
2. By implication of subsidy removal, the gap between the price of petrol in Nigeria and neighboring countries will be narrowed thereby discouraging further smuggling
3. Absence of smuggling will translate to reduced demand for foreign exchange.
4. Genuine demand for LC viz-a-viz demand for forex will also drop in the likely consequence that fuel consumption will reduce. This follows from the logic that higher price will translate into lower demand.
5. Overall, in view of an expected constant supply, a reduction in demand for foreign exchange will translate to a drop in price.
6. A stronger Naira will translate to a reduction in inflation because Nigeria has a high propensity for Importation.
7. As the naira becomes stronger, the price of imported petrol will drop.

the more you look,the less you see

Remii:

Lagbaja, I am sorry to say that almost all your answers are based on ceteris paribus but in Nigeria all things are never equal. Only Yar Adua have ever reduced price of fuel, and Naira is not getting stronger anytime soon, not with so much importations by all and every sectors of economy.

His analysis is so laughingly naive that it's pretty embarrassing, but i'm sure his secondary school economics teacher will be proud somewhere. But instead of waisting keystrokes taking his simplistic theory apart, i think we should exercise Patience Jonathan and agree to convene back at this spot in 3 months time. Remember, cheaper fuel and stronger naira in 3 months time, bump.

I agree that Lagbaja's assertions and conclusions are at best utopian.

I think the government is using the smuggling argument to dupe us. How many litres of oil do the neighbouring countries consume. I am sure that the total consumption of all neighbouring countries is not up to half of what lagos consumes. So smuggling cannot account for the astronomical increase in subsidy bills.

Basic ecomonic state that the strength of you currency is determined by it demand, based on goods exported abroad. But with the removal of subsidies, we will only spend more money buying the same quantity of petrol, that is inflationary. Inflation will lead to further devaluation of the naira and one year down the line, the proposed price of N140 would be unrealistic and the need to remove subsidy again.

The main problem is not necessarily the cost of crude, but the fact that each time we increase fuel prices, the naira loses value and make nonsense of the increase when denominated in dollars

VoodooDoll:

Let's also keep in mind behavioural economics and the tendency for Nigerians to move like sheep.

Transport prices have gone up today, these include diesel powered vehicles, reflecting Nigerians tendency to move enbloc. Once transport and other things go up then you immediately have increased pressure on prices. Will CBN increase the supply of Naira?

SLS has already warned inflation is coming, though he thinks prices will increase by only 2% from 10.5% to 12.5%. Are travellers facing only a 2% increase in transport today? The govt has a fight on its hands to keep down inflation and by connection a stable FX rate band.

At the end of the day the market will determine the price and I can already see the price band increasing from N163 - N165 to USD1 and moving to something worse. A disciplined govt and CBN can stop inflation but I remain unconvinced.

I awash you with a PhD from UNIPORT , spot on Bro, The truth remain that pro-GEJ supporters seems to live in the world of fantasy with assumptions so far away from what is obtainable in Nigeria!

Hoping prices will even themselves out in Nigeria is a huge joke! The saying forever remain: "In Nigeria, prices of goods and services never go down, they always go up and ever so"

koruji:

Analysis is full of holes.

1. Contrary to the anecdotes, smuggling is a small part of this whole story, so you are counting phantom savings that doesn't exist.

2. Counting the reduction in fuel consumption due to the more than doubling of the price of fuel is like a FATHER COUNTING HIS SAVINGS FROM REDUCING THE FEEDING OF HIS HOUSEHOLD FROM 3 MEALS A DAY TO ONE. That is senseless. Actual reductions in fuel demand mean actual reductions in the welfare of the average Nigerian, and at the end of the day of the economy as a whole. GEJ likes to say our economy is growing at 7%, but without palliative measures look that to drop to 4-5% this year.

3[b]. If other countries join in increasing prices which reduces demand for petrol then the reduction in crude oil might cause the price of oil to go down by a couple of dollars. That translates to a real loss of revenue for Nigeria.
[/b]

The bolded could just be the reason the IMF has been pushing African countries to remove subsidy on pet,basically to help plug some holes in Western budgets (Reduced crude oil price is good for Western budgets) .Goodluck Jonathan is a bigger threat to Nigeria than Boko haram but our focus should be on Okonjo,shes the real face behind Oro (masquerade) tin ke ninu igbo (shouting in the forest)

E le i ti a lai mo'kan fi n'se ara e lo po ju i.e

.
Korda!

The govenment needs to provide us with accurate data before I can be convinced that we are not being duped. So far the government just reel out figures without any data to support it.

They should tell us who, how much and quantity of petroleum supplied by the marketers.

The should give us data of petrol supplied go distributors on a state by state basis to justify their 35million litres a day daily consumption (or is it 40)

They should tell us the quantities our refineries produce and what happens to the balance of 425,000 barrels for local consumption.

I don't think this subsidy removal will make any impact on our naira.

I think the naira will be more stable.

*I smear dat President Jonathan has username on nairaland.I suspect he is d initiator of this silly thread or maybe one of his allies.The suffering vested on nigerians by the insensitive removal of fuel subsidy surpasses the ghost reason given here.GEJ government is disaster waiting to happen.

Most of you have commented sentimentally. While economic factors are not absolutes, the fact is that a drop in fuel demand is going to boost the Naira not reduce it. Certainly smuggling is a big factor. Whether you agree or not, fuel smuggling is a big problem. It is not rocket sceince to know that someone will smuggle fuel out of naija if the price in naija is less than the price in neighbouring countries. The same reason why Nigerians go and buy cars from Cotonou. Now that is not to say I am arguing in favour of subsidy removal. Just stating the obvious reactions. The fuel subsidy removal does have its merits and demerits. You can not say it doesnt have its merits except you want to lie to yourself. The argument is whether the demerits outweigh the merits.

The exchange rate must increase for the government to collect back the extra-gain from those oil importers and others otherwise hahaha!!!

Africans. . . . Always playing puppets to the western world.

without actually reviewing the numbers, it is difficult to say for sure if the subsidy removal will have a positive or detrimental effect on the FX rate, however, lagbaja brings up a good point. The presence of the fuel subsidy in itself breeds corruption within the country's elite, it is this corruption that needs to be addressed and tackled squarely.

food for thought: although actual volumes of petrol smuggled across the nigerian borders may be small compared to the overall local consumption figures, i can assure you that the numbers presented to the government for subsidy returns are bogus, inflated and falsified beyond our imaginations, the government is now required to make these payments obviously in USD for figures beyond what we actually consume, the recent debates have revealed that the figures presented for subsidy payments are not credible.

my take on this: as government has removed fuel subsidy, then government in turn should subsidize and peg public transport rates as a palliative to fuel subsidy removal as this is the main sector that is affected directly by the fuel price increase, another recommendation would be to increase minimum wage.

koruji:

Analysis is full of holes.

1. Contrary to the anecdotes, smuggling is a small part of this whole story, so you are counting phantom savings that doesn't exist.

2. Counting the reduction in fuel consumption due to the more than doubling of the price of fuel is like a FATHER COUNTING HIS SAVINGS FROM REDUCING THE FEEDING OF HIS HOUSEHOLD FROM 3 MEALS A DAY TO ONE. That is senseless. Actual reductions in fuel demand mean actual reductions in the welfare of the average Nigerian, and at the end of the day of the economy as a whole. GEJ likes to say our economy is growing at 7%, but without palliative measures look that to drop to 4-5% this year.

3. If other countries join in increasing prices which reduces demand for petrol then the reduction in crude oil might cause the price of oil to go down by a couple of dollars. That translates to a real loss of revenue for Nigeria.


E le i ti a lai mo'kan fi n'se ara e lo po ju i.e. the injury to self is the biggest result of ignorance.

1. Available figures show that smuggling and "insider tradings" and corrupt practises accounts for more than 50% of the subsidy payments . how else do you explain a sudden increase in demand volumes even when economic activities are at the lowest. Demand for petrol was also not commensurate with growth/decline in Nigerian disposable income.

2. Increase in price will naturally cause people to be creative about the use of the commodity thereby bringing down the volume of fuel consumed


3. your third point is not a direct consequence of subsidy removal . That will happen with or without subsidy removal

dmainboss:

Most of you have commented sentimentally. While economic factors are not absolutes, the fact is that a drop in fuel demand is going to boost the Naira not reduce it. Certainly smuggling is a big factor. Whether you agree or not, fuel smuggling is a big problem. It is not rocket sceince to know that someone will smuggle fuel out of naija if the price in naija is less than the price in neighbouring countries. The same reason why Nigerians go and buy cars from Cotonou. Now that is not to say I am arguing in favour of subsidy removal. Just stating the obvious reactions. The fuel subsidy removal does have its merits and demerits. You can not say it doesnt have its merits except you want to lie to yourself. The argument is whether the demerits outweigh the merits.

The point is one of those merits certainly isnt a stronger currency as a result of an end to petroleum smuggling. The factors affecting the value of the naira are far beyond petroleum smuggling.

i don't knw what u guys r analyzing,bt as far as am concern, since i ws born i have never heard when prices of things go down, they always go up nd up they go. In nigeria tins dnt cme down, if we allow dis subsidy to b removed like dis, den we r doomed, because dats how tins will remain, we ll hyper gallopin inflatn. Den our naira ll b worthless. Dis is nt telecom industry. Dis is fuel dat drives every othr tins. Wen fuel goes up, all oda tins follow, nd evn wen d fuel cmes down, those tins wont.Y? Becos dis is 9ja.

a frustrated unemployd Tunisian
graduate commited suicide by settin fire
himsef using petrol on 17th Dec 2010, he
probably didnt knw his death was a
singular action dat wud initiate massiv
chains of revolution across d arab nations of Tunisia, Egypt, &Lybia.
Truout dis countries, citizenz mobilized
demselvz n occupied ȡ streets 2protest
i̅ƞ anger, resilience, n courage, for days
till dey succeded i̅ƞ forcin ∂iä dictator
leaders out of power thus lettin i̅ƞ a fresh wind of change.
Today, petrol sells for 141 naira/litre i̅ƞ
Nigeria( a country richer but wit a worse
economy dan any of ȡ aformentioned
nations). Funnily enof, our youths choose
2laugh Ãήϑ mk jokes abt an issue of such magnitude, both ∂iä mobile
(blackberry) phones &online web pages
(facebook n twitter) by circulating
images Ãήϑ texts D̶̲̥̅̊åt only portray how
cowardly, lazy and unconcerned we are
abt our future. LETS EMULATE OUR MATES IN EGYPT, let's ask dem how dey used
τ̅hξ media n social networking sites 2
awake frm dia slumber n kick τ̅hξ tyrants
amongst dem out.
PLEASE, IF U LOVE NIGERIA beyond mere
words, JOIN US IN THIS REVOLUTION 2morow (Jan 3) by 8a.m at τ̅hξ following
converging venues:
LAGOS (NLC Council 29 Olajuwon Str.
Yaba)
PH (12 Igboukwu Street, D/Line, PH)
IBADAN (Mokola, i̅ƞ front of Tanties, 9 a.m)
ENUGU (No 1, works road, by onitsha rd 9
a.m)
MAKURDI (Woodland Park, 10 a.m)
GOMBE ( Emir's palace 9 a.m)
ABUJA (Labour headquaters 8 a.m) AKWA (5, Udoka Housin Estate)
Pls if ǜ ar outside any of dis areas, we
assure u ∂iä ar already plans for protests
i̅ƞ ur zone, locate Ãήϑ join dem, or
better still mobilize people).
NB: KINDLY REBROADCAST dis message as soon as ǜ get it, there are rumours that
to forestall protests tomorrow, BIS
services will be shut down by service
providers (†☹ be ordered by
government). If that happens, text or call
07003200882. COALITION FOR A NEW NIGERIA
(Enough is Enough). Thanks.