Nigeria News
Labour, subsidy and economic dysfunction

The feelers from snippets of information so far available from the 2014-15 budget projections clearly suggest that, inspite of dwindling revenue due to prevailing lower crude oil prices and output, Nigerians may still be compelled to dedicate almost N1500bn or over 20% of next year’s federal budget to the intangible and unsubstantiated benefit of subsidising fuel consumption nationwide.

Alarmingly, the allocations for fuel subsidy often exceeds the consolidated provision for infrastructure and human capacity enhancement for all federal Ministries, departments and Agencies. Evidently, in the event that the beneficent impact of such relatively meagre capital vote was barely noticeable in 2014, we may confidently also project that the social welfare of the masses may similarly see little or no improvement come December 2015.

Subsidy-IncorporatedFurthermore, it has also become acutely glaring that so long as such wasteful management of our resources continues, we will have to take any promises of rapid and vibrant economic growth and job creation with a pinch of salt, especially when CBN’s inappropriate strategy of high monetary policy rates and its attendant market credit squeeze which equally constrains enterprise, remains abiding.

Nevertheless, inspite of the foreclosed recognition of the potential failure of government’s extant fiscal and monetary policy strategy, the January, 2012 pro-subsidy mass demonstrations may have intimidated government and forestalled any attempt to redeem our economy by terminating the recklessness and wastefulness of further payment of subsidy on petrol and kerosene, so that the relatively meagre capital allocations could become doubled to rapidly ameliorate our severe infrastructural deprivations particularly in the areas of education, health, transportation and power.

Although Labour’s opposition to fuel subsidy removal may suggest an anti-economic growth posturing, such perspective may be grossly incorrect!  Labour, without a doubt, is evidently sincere in its apprehension that fuel price deregulation will not unfailingly bring down prices and stem inflation with salutary impact on all income earners, including that of its members, as per government’s promises!  Labour rightly recognizes that although the concept of deregulation is ideal, and should normally provide a more level playing field, but Nigerians have also learnt over the years to be wary of government propaganda.

In this particular instance, Organised Labour intuitively knows even if they cannot place their finger on the missing link, that something is amiss in the overt simple equation of deregulation = lower prices.  In any event, experience  demonstrates that local fuel prices should rise whenever crude oil prices rise, but Labour cannot yet see what government has put in place to stem this sympathetic relationship between rising crude and local petrol prices, while critics also recognise that not even deregulation as presently construed has the capacity to change this framework. Besides, observers also find it inexplicable that domestic fuel prices however, do not fall even when crude prices fall, as is currently the case.

An end to NNPC monopoly and introduction of market determined price regime will certainly attract more importers as well as serious investors in the provision of additional private refineries; but, it would also be out of place to supply our crude oil to such refineries at a price below the current world market price for the commodity.  Any attempt to do this would be akin to reintroduction of subsidy through the backdoor!  Indeed, the potential abuses of such a system may create a bigger hole in our pockets than the erstwhile trillions of Naira allegedly corruptly paid to fuel importers in the present regulated market.

With the above scenario, Labour’s insistence that the four existing refineries be retooled to produce at full capacity and or that more refineries be built is therefore obviously not the answer to full subsidy removal.  Yes, more refineries may ultimately mean more fuel availability, but this may not necessarily bring down prices, especially when international crude prices rise.  Indeed, it is curious that in spite of Labour’s awareness of the hundreds of millions of dollars ‘wasted’ on turnaround and other maintenance projects in the existing four refineries, the production streams still remain epileptic, while Labour inexplicably insists that more good money be further wasted on refurbishment as we have done over the years!  Surely, the intention of Labour is certainly not to encourage and sustain corruption.

Despite the obvious debilitating burden of fuel subsidy on our economy, the government is unlikely also to even want to broach any discussion with Labour on this ‘albatross’ so that their popularity in the 2015 General elections is not jeopardised.

However, some observers recognise, that even after the elections have come and gone, it would still remain a daunting task for government to persuade the public to accepts over 50% increase in the purchase price of fuel; the knock-on effect of such a price rise would most certainly push the rate of inflation back into double digits and seriously challenge any effort of the Apex Bank to achieve its core mandate of price stability. Inflation which is a silent plague will ultimately severely constrain demand and deplete the purchasing power of all income earners, particularly the poor.

So if neither refurbishment nor new refineries will ultimately bring down fuel prices so that subsidies become inapplicable, how can we then reasonably expect government to jettison these wasteful and retrogressive subsidy payments so that the related savings can be applied more wisely to the enhancement of the social welfare of our people?

Indeed, how do other oil producing countries, not only, avoid subsidy payments, but actually also earn a sales tax on each litre of fuel sold? In truth, rising crude prices should normally increase fuel prices worldwide, but in the peculiar case of our country, the major driver of fuel price is actually the inappropriately priced Naira.

A simple example may suffice; for example, if the international price of 1 litre of fuel is $1, then of course, this would translate to about N160/litre in Nigeria (with Naira exchange rate of $1=N160). If on the other hand, the Naira exchange rate strengthens to N80=$1, (with stable crude oil prices), them of course, 1 litre of fuel would sell for N8/litre, which is well below the current subsidising price of N97/litre. Indeed, our government could thus save the payment of over N1.5tn subsidy and similarly levy a sales tax of up to 10% or more on each litre of fuel sold.

Fortunately, as regularly advocated in this column, the Naira rate of exchange will ultimately becomes stronger and makes the above scenario possible once the CBN stops the substitution of dollar revenue with freshly created Naira allocations.

Save the Naira, Save Nigerians!!

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