Yesterday on Channels TV, the economist Henry Boyo told us the root cause of the current fuel subsidy and pricing wahala as the monopoly held by the CBN in the foreign exchange market. However, Deji Bademosi, the anchor of the show which featured Sen Tokunbo Afikuyomi and Nasir El-Rufai seemed to have done a terrible job with the interview as he appeared to dismiss or intentionally ignore Boyo's analysis which infuriated him. Boyo gave a deeper insight than the arguments of the protesters, adding that he had been studying this issue for around 10 years, sort of hitting the nail on the head. Below is an article he authored and which was published in the Punch newspaper.


CBN and fuel subsidy
January 6, 2012 by Henry ‘Jimi Boyo

The removal of petrol subsidy is one area that has exposed our government’s characteristic indecision and prevarication. Government’s claim to subsidy value of over N600bn per annum is considered outrageous and unsustainable as these expenses subhead alone usually exceed the consolidated capital votes for health, education and transport each year. Meanwhile, Nigerians continue to bemoan the huge infrastructural deficits in these critical areas of social welfare, but still rigidly insist on the maintenance of this oppressive expenditure pattern. Indeed, the Peoples Democratic Party led-government has continued to threaten Nigerians with petroleum subsidy withdrawal for over six years, with renewed calls and affirmation by government officials every month or so. The bombshell was finally thrown on New Year Day when the government announced the removal of the subsidy on petrol.

Nonetheless, subsidy has increased from just over N100bn in year 2000 to its current value of over N600bn, while government continues to make feeble noise on the end of subsidy. The truth, of course, is well recognised by government that removal of subsidy will bring untold hardship to all Nigerians (especially those who do not have easy access to government treasury). But there is the possibility that subsidy could exceed over 70 per cent of our capital budget, if oil prices rise fortuitously to above $100/barrel in the next 12 months. If this happens, any hope that we will make any serious impact on our infrastructural deficit may well be a pipe dream together with the porous Vision 2020 strategy.

I have maintained without equivocation in the last six years that it will be impossible for government to cancel subsidy (i.e. dismantle the Nigerian National Petroleum Corporation’s current petrol import monopoly) without first dismantling the monopoly of our Central Bank in the foreign exchange market, where the CBN controls over 80 per cent of all dollars traded in the market while it maintains its constitutional monopoly of all naira issuance concurrently. Needless to say that government’s dilemma on fuel pricing firmly corroborates our observation.

However, we have noted how the adoption of the instruments of dollar certificates (strictly not cash) for disbursement of dollar derived revenue to constitutional beneficiaries would immediately lead to steady decline in local fuel prices such that ‘subsidy’ will become unnecessary while government will be repositioned to actually derive substantial revenue from a sales tax which can be levied without any opposition from labour.

In other words, the adoption of dollar certificates will make available over N600bn for capital and social welfare enhancement in addition to a sales tax revenue of up to N10/litre on the estimated 30 million litres of fuel consumed daily. If the situation can be turned around so simply and beneficently, why is the government pussyfooting on this vital issue? The only obvious reason for government’s lack of enthusiasm to embrace this reality is that its adoption would quickly reduce the space for corruption and self-enrichment, particularly in the CBN, the commercial banks, the executive arms of government and in the bureau de change, who now serve as a collaborative conduit with treasury looters to facilitate money laundering.

A national newspaper’s editorial on June 17, 2010, entitled, “CBN and Petroleum Subsidy”, aptly captures the issues. It is axiomatic that the same CBN which is primarily the promoter and the villain in the scourge of subsidy is also shouting the loudest for its removal. Some analysts observe that it is a case of propaganda and an attempt to distract attention and divert recognition of the apex bank as the engine of our problem. The editorial under reference noted among others that:

“The problem of petroleum subsidy has lingered for several decades and it is therefore regrettable that the CBN failed to look inward for alternative options for resolving the matter, a sine qua non – confirmed by the following cursory historical review. Petroleum products have not always been subsidised nor did the outset of subsidy result from lagging petroleum product prices relative to changes in the international price of crude oil. From its stable price of 8.8 kobo per litre in 1966-78 when there was no subsidy, petrol price rocketed by 73,700 per cent to N65 per litre today.

“Also diesel which retailed at 11 kobo per litre in 1985 zoomed to 99,900 per cent or N110 per litre currently. But crude oil, even at the peak price of US$147 per barrel in 2008, rose by only 880 per cent over the 1978 level of $15 per barrel. Hence nominally, with domestic petrol and diesel prices outpacing crude oil prices by 84 fold and 114-fold respectively during the period, the culprit in the vexed subsidy is the precipitous depreciation of the naira by over 99.6 per cent since 1980 with its attendant high inflation. Doubtless, the monetary and fiscal authorities culpably left their job undone.

“Accordingly, until the CBN begins to correctly infuse federation account dollar proceeds into the system so as to halt the slide of the naira and stem high inflation, removal or reduction in petrol subsidy would leave the masses worse off. On the contrary, when government flushes out (as it should) the oil sector cabal currently cornering substantial part of the subsidy, the lot of the masses would improve. Poised against the masses, Sanusi further sought to justify his position by claiming falsely that government was borrowing to pay petrol subsidy debts. The truth is that proceeds (local or external) from any volume of crude oil allocated for domestic consumption more than cover whatever shortfall that might arise because of the controlled pump price of petrol.

“For now, as the CBN searches for excuses for its unending failures, Nigerians should be spared the distraction and economic pain that the removal of the remaining petroleum subsidy could cause.”

However, how do Nigerians see government’s argument and propaganda for rationalising subsidy removal? To answer this question, we will conclude this week’s piece with excerpts from a rejoinder entitled, “The Arithmetic of Subsidy, the ‘Isiro’ of Deceit” (isiro in Yoruba translates to calculation) by Oyewale Tomori, a Professor of Virology on page 64 edition of the same newspaper on June 24, 2010. It reads as follows:

“The campaign, or rather the war to remove subsidy has been going on now for some time; the losers will be the ordinary abandoned, deserted, discarded, forsaken, neglected and done for citizens of Nigeria… They have employed tactics bordering on deceit, trickery, duplicity, deception and guile.

It is either somebody is trying to fool us, or the secret of how much we really need to develop this country has been inadvertently released to us.”

•Boyo, an economist and entrepreneur, wrote in from Abel Sell Limited, Lagos via lesleba@lesleba.com.


See also https://www.nairaland.com/nigeria/topic-844496.32.html#msg9949491
and https://www.nairaland.com/nigeria/topic-844496.0.html

taken from http://www.lesleba.com/

Not a single response to this, with all the Nairaland economists in the house?

Just have to take my time to study this information before making comments. It's quite a long one.

^^
Already read it through. The illustrations make it really simple. Economics for dummies
Only one part of it is not so clear. When the government tiers present the dollar certificates to the banks, how do they determine the value at which they will exchange? Does that imply that these arms will prepare their budget in dollars? Allocation is driven by budget. How would that work?

I would think that's why CBN has to fix the rate. Else the bank that has the lion's share of government allocations will effectively be determining the rates. Which is what Mr Boyo is complaining that CBN is doing. I think CBN will still have to fix a benchmark price, which will be loosely determined by market forces. That way everybody can still budget with Naira.

Still, it is good to see people coming up with innovative solutions to Nigeria's economic problems. Unfortunately, like everywhere else, Big Government = Big Bureaucracy = Corruption and Incompetence.

The spambot is yet to resume from strike abi?

I don't really think the various tiers of govt need to prepare their budgets in dollars. What happens is that when they present the dollar certificates to the banks they will be paid based on prevailing exchange rate, determined entirely by market forces.

chamber2:

I don't really think the various tiers of govt need to prepare their budgets in dollars. What happens is that when they present the dollar certificates to the banks they will be paid based on prevailing exchange rate, determined entirely by market forces.

Even the market needs a benchmark. CBN can set a benchmark rate. The actual rate should be left entirely to demand and supply.
What about the forex market? With the rise of electronic commerce (cards, etc) do we really need to sell forex in the marketplace?

I read Les Leba's arguments in Punch the Friday it was published; I read it over and over again and found it very plausible. I remember sending an sms to a CBN topshot after the article couple of weeks ago, asking: what do you see about Les Leba's proposition?

I also watched the Channels' interview with him and I realized Deji did not appear to be on the same page with him.

I agree with him on his suggestions, especially as it is multi-faceted: tackling inflation, a better way to deregulate, etc

But like any economic policy, it is not a silver bullet, it will have its shortcomings, though I've not been able to pinpoint one.

What I gathered from Boyo's arguments is that some people (a cabal?) have been deliberately short-circuiting the development of the Nigerian economy. Can Sanusi claim ignorance?

In my opinion, Mr Boyo's argument is a valid one, because the current method of sharing our crude oil earnings has placed inflationary pressure on the naira, thereby causing its value to constantly slide against the dollar, reducing the real value of our crude oil earnings and increasing the cost of the subsidy. However, liberalising the forex market alone won't help reduce the price of petrol if the various costs involved in the value chain, such as sea transport cost (plus insurance), demurrage, as well as the notorious corruption in the sector are still being needlessly incurred, and so it comes back to our original argument: OUR REFINERIES MUST WORK.

Topics like this will not make the front page nor be discussed upon by people, rather lewd and irrelevant topics will continue to flood the fp.

bxcode:
Topics like this will not make the front page nor be discussed upon by people, rather lewd and irrelevant topics will continue to flood the fp.

Come on man, fp is for guests and visitors.

Somehow somehow, buhari and his team needs to see this ideology, this is Gold wasting on the bookshelf!


...and it needs to be moved to frontpage, any luck president lalastica? Senate president mynd44, any hope? Nigerians need to be educated sir

bxcode:
Topics like this will not make the front page nor be discussed upon by people, rather lewd and irrelevant topics will continue to flood the fp.

No it will not make fp because most Nigeria literates are not used to figures and analysis.

And that thing you guys call front page is actually traffic page. Seun and his mods don't care about what's posted there so long it brings the desired traffic.

franconian:


No it will not make fp because most Nigeria literates are not used to figures and analysis.

And that thing you guys call front page is actually traffic page. Seun and his mods don't care about what's posted there so long it brings the desired traffic.

Na propaganda like efcc arrested someone dey hit front page well well.

This is really an eye opener,a lot of valid points,emefiele and co are purely devils.

This is a gold mine right here, but a lot of selfish Nigerians benefiting from these bureaucratic shady deals wont allow a comprehensive measure like this see the light of day

989900:


You are right.
I've posted this link more than 2 dozen times over the last 9 months.

There is a mental vacum in our society . . . why we suffer.

We are used to suffering and smiling, nobody wants to die for any cause. Nigerians deserve what comes their way.

Petrol is 112 per litre in Port Harcourt, electricity bill have increased without any improvement in power supply.

It has one flaw I spotted from first reading. A better naira will like make Nigerians import a lot of finishing products as well except if electricity and other factors for industrialization are put in place. If not the economy will definitely crumble cox if my #200 can buy me a bottle of wine from Europe why will I buy the fake ones produced here. Just my opinion

If Nigeria grows religion will gradually fade out,or go down,and all this christian and muslim discrimination will disappear.

Read later

Lalasticlala this is history ooo

Very clear and easy to understand. This economist predicted right but of course, we do not enjoy the truth. We only value fake prophesies.

And who says dead bones shall not rise! Four years after the OP, this thread roars back to life most relevantly.

It beats me everyone laments the state of the economy and here comes a plausible even if not infallible attempt at correcting the situation, then nobody comments! Even 3 days after ressurection, the thread is still on first page, never mind front page.

Mr. Boyo's ideas need to be brought to the fore and debated more.

Boyo's economic views on the subject does not take into account of a lot of possible variables.
---
(1) What would be the status of our Federal Reserve if CBN shares FX directly to the states? Where would the FG get FX for strategic national issues like arms purchases or fuel imports.
(2) Considering how weak our bureaucratic institutions are (as evidenced from the infamous Dasuki-Gate), how are we sure most of the dollars to the states will not find their way into foreign accounts with very little left to serve local demand?
(3) State government officials, in collaboration with bankers will engage in more roundtripping than what currently exists. I experienced this first hand working in a regional office of one of the banks. The state govt received over $80m from their divestment in Econet. They sold the FX to the bank at a rate much lower than the prevailing rate (about N5). Of course, I got to understand that the bankers and state AG/COF shared the N(5x80m=400m) amongst themselves.
(4) There is no cosmetic solution that can save the Naira other than promotion of Import substitution and exports. Failing these, any other policy will only strive to ration available FX.
(5) The current administration has stopped fuel Subsidy without increasing pump price of PMS. Government is also working hard to revive local refineries. This should reduce pressure on FX.

quite long. but ok