Subsidy: Nigerians like sheep to slaughter

Kachikwu

Kachikwu

THE pace of governance under President Muhammadu Buhari has been decried in some quarters as being slow in providing clear signals of a realistic, regenerative economic blueprint; some other Nigerians, conversely endorse Buhari’s more complimentary self-branding of being slow and steady. Nevertheless, in the absence of any formal declaration of an economic strategy, it may still be possible to deduce government’s mindset on some critical challenges, through snippets from comments by senior government officials.

In this regard, the defense for fuel subsidy retention by Emmanuel Kachikwu GMD-NNPC at a recent Senate screening, may be enlightening; in his remarks, the minister of state confirmed that Buhari is not oblivious to the demand, particularly, from the private sector, that subsidy should be removed without further delay. However, according to Kachikwu, “in my conversations with His Excellency, the President… is deeply worried that if we take away this subsidy without adequate plans on palliatives, … what is going to be the impact on the populace?” For this reason, Kachikwu reported that “we are having a continuing dialogue on this, I think, however, that we are both determined that at some time, given the effect on the national economy of subsidy today, something would have to happen on subsidy.” Unfortunately, there was no indication of how long the Presidential dialogue on subsidy, with Kachikwu, will continue before a sustainable and popular solution will evolve.

Alarmingly, average subsidy payments, inexplicably often exceeded N1trillion or 20 per cent of annual budgets in the last five years. This ‘obscene’ reality in a major oil-producing nation is probably the stuff from which tragic comedies are inspired; sadly, we are the “happy and gullible” caste of this ugly drama!

Ironically, despite the biting scarcity of job opportunities at home, we think nothing of exporting jobs to countries who refine our crude; it is apparently, also no big deal if Nigerians are schemed out of the lucrative shipment of our crude exports and fuel imports; neither does it matter if our daily fuel requirement is 40m litres as per data projections or actually just 25m litres as suggested in Kachikwu’s comments at the recent ministerial screening.

Furthermore, it seems also of no significance, whether or not 40 per cent of all foreign exchange remittances from Nigeria are in fact dedicated to the settlement of fuel imports bills; little wonder therefore, that such heavy foreign exchange outflows constantly deplete CBN’s reserves and ultimately threaten the Naira exchange rate as dollar supply become relatively scarce to meet other demands.

Indeed, despite the several negative attributes of subsidising fuel imports, “Buhari is deeply worried” according to Kachikwu, “on what will be the impact on the populace” if subsidy is abolished.

The President is obviously clearly conscious of the depth of poverty in Nigeria and, he is, therefore, rightly, wary of increasing the burden of deprivation on our people. Buhari similarly recognizes the relationship between the general price level and increasing fuel prices in our economy. It is certainly too early, to forget the January 2012 nationwide mass uprising triggered by Jonathan’s ‘misguided’ plan, to summarily remove subsidy, despite his promise to channel the related ‘savings’ to tangible social infrastructure.

Nonetheless, some experts still suggest that real growth in economic and social welfare and the hope for reduced budget deficits will remain impossible if fuel subsidy is sustained; these analysts insist that the trauma of a sharp price rise due to subsidy removal will, after all, be short-lived as prices will gradually stabilise overtime, as Nigerians make inevitable adjustments to the evolving harsh austerity in the country.

The question, however, is whether or not the price spiral would actually stabilise in the short to medium term after a sustainable downward adjusted equilibrium in lifestyle and individual consumption habits has been established. Regrettably, there are no guarantees that this would be the case; evidently, if the economic albatross of eternally systemic Naira surplus subsists, as it has for over two decades, inflation may well exceed 15 per cent by 2017!

Instructively, unrestrained spiraling inflation would inadvertently weaken the Naira exchange rate, particularly, if government’s revenue base remains constrained by low crude oil prices. Ironically, higher crude oil prices will instigate increase in Naira supply to also induce Naira depreciation. Conversely, however, further depreciation of the Naira exchange rate will, again, invariably spark higher fuel prices; for example, if dollar appreciates under demand pressure to say N300=$1, imported fuel price will simultaneously rise by about 50 per cent without any subsidy! The question, however, is how Nigerians will react to the impact of another significant spike in fuel price, with the inevitable knock on impact on an already oppressive general price level.

In essence, it is clear that unless inflation and Naira exchange rates can be kept in check, fuel price will remain volatile with serious social and economic consequences, which will make subsidy abolition very unpopular. In recognition of this reality, Kachikwu’s observation is “that the President is “a lot more disposed to attacking subsidy, once he is able to deal with the palliative issues rather than summarily yanking it out”.

To this end, the government would first, according to the NNPC-GMD, seek to direct more funds towards improving facilities in such areas as “the National Health Scheme, the railway network and the enhancement of power infrastructure”. Clearly, these are medium to long-term gestation projects, for which completion may dovetail close into the election campaign year of 2018-19. Thus, despite the attendant inherent distortions, subsidy may unfortunately remain with us for at least two to three years hence, or even possibly longer, if inflation and exchange rate depreciation as usual, also remain uncontrollable.

In reality, the promise of palliative measures is not new in our endless battles to mitigate the impact of rising fuel prices; regrettably, both the Obasanjo model and Jonathan’s version of Sure-P failed miserably to create the desired impact on social infrastructure and job creation. There is currently nothing to suggest that the Buhari model of palliatives will have a successful colouration, at least not for another two to three years; furthermore, with the constant challenge of systemic excess Naira supply, there is no hope either, that the naira exchange rate will remain stable: such uncertainty on these critical issues portend serious economic dislocation with adverse social consequences, which cannot, surely, be the expectation of the quality of change Nigerians urgently desire.

It is noteworthy that Kachikwu made no reference, whatsoever, to any plan for the construction of more public refineries to reduce the huge Forex outflow from fuel imports; this omission may be read as body language to imply that government may not be looking in the direction of new government refineries, as possible solution to unbridled fuel imports, high fuel prices and related subsidy payments and depleting Forex reserves.

Instructively, despite government’s apparent dilemma, the fuel supply and subsidy debacle will be salutarily resolved, if the Naira exchange rate gradually becomes stronger; for example, if Naira exchanges for N100=$1, fuel price will rapidly collapse without subsidy below the current N87/litre and may accommodate a petrol sale tax/litre to bolster government revenue.

The Naira exchange rate would invariably gradually harden and check inflation once Buhari agrees to stop the subsisting retrogressive strategy of substituting Naira allocations for dollar denominated distributable revenue. The systemic Naira surplus induced by this process actually subsidizes the dollar exchange rate with depreciating Naira values and this process has poisoned the impact of monetary policy instruments over the years. Undoubtedly, Mr. President’s failure or success with the management of the economy squarely rests on the recognition of this stark reality.



1 Comment
  • emmanuel kalu

    is this article arguing for better exchange rate or for fuel subsidy removal. There is the a difference between being able to afford something and not. we can’t afford the subsidy, so it has to go. first of all, Nigerian’s are paying well above the official fuel price. so there wouldn’t be much shock to fuel price increase. The government should slowing increase the official price, this would reduce the subsidy paid. second, the government can deregulate the sector, which would help encourage investor to build refineries. The government should push for modular refineries that cost less and are quicker to install. while refineries are being build and brought online, NNPC should be allowed to import the bulk of the fuel needed. This fuel would be sold at cost with small profit added. what this does is force down the price and provide competition for the marketers that are over pricing their product. With effective regulation against price gouging, we can keep fuel price to a reasonable amount. As for what to do with the saving. Two things come to mind that would immediately impact the people. use the money to provide each state with at least 10 mass transit buses. This would help the state start their own mass transit agency or system. use the money to immediately provide and install locally produce international certified meters across the country. This would reduce the burden on the discos, which would have to repay the cost over a period of time. it would also save the people the crazy bill and begin the process of steady electricity.

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