The Oppressive Folly Of Fuel Subsidy | Independent Newspapers Limited
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COLUMNIST, Les Leba

The Oppressive Folly Of Fuel Subsidy

Posted: May 13, 2015 at 12:00 am   /   by   /   comments (0)

LESLEBA

LES LEBA, 08052201997, lesleba@gmail.com, lesleba@swiftng.com,

lesleba@lesleba.com,   www.lesleba.com

The data released by responsible Agencies of government on fuel subsidy outlays, have overtime, regrettably remained divergent, such that, it has become a challenge to obtain definitive estimates. Nevertheless, the Finance Minister, Dr. Ngozi Okonjo-Iweala recently explained that the inconsistent figures often quoted were unavoidable because subsidy payment is a continuous, rolling process, therefore, relevant government agencies, in the chain, can only provide specific data relating to approved claims which have passed through them at any point in time.

The above notwithstanding, what is clear however, is that we are spending a disproportionate amount of our Federal budget to fund subsidy payments, which add up to over N500bn, or an average of 10 percent of each Federal budget since 2011. Incidentally, despite the obvious severe social deprivations caused by our dismal infrastructural deficit, critical sectors such as Education and Health, were never so favoured.

Well, if one is already concerned at the apparent misplacement of priorities, then you may be alarmed, that subsidy values actually exceeded 20 percent of total Federal budgets in recent years. This is because, in addition to over N500bn actual payments annually, the value of unsettled bills often exceeds another N500bn annually. Indeed, in corroboration of such bloated expenditure, the Daily Independent, carried a report titled “FG spent N6.354tn on subsidy in 5 years” on Pg. 2 of the edition of Monday, 4/5/2015.

Infact, according to the Co-ordinating Minister, it is not unusual for subsidy allocations to be omitted from annual appropriation bills; nevertheless such subsidy claims are settled ultimately with the knowledge of the Finance Ministry without recourse to Legislative approval as constitutionally required. Why the National Assembly condoned this blatant violation of annual fiscal Acts, despite the unathourised monstrous outflows involved, remains unclear.

This tradition of impunity was stepped up this year with possibly, over N200bn additional commitment recklessly incurred without prior Legislative consent, as penalty for bank interest on delayed payments and exchange rate differentials on a ‘core’ subsidy bill of N40bn as reported by Thomas Olawore, the Executive Secretary of the Major Petroleum Marketers. (Daily Subsidy on PMS rises to N1.7bn on Pg. 38 in Punch newspaper edition of 30th of April, 2015).

Clearly, if this bizarre fiscal trajectory continues, cumulative fuel subsidy values may ultimately exceed 50 percent of annual budgets, particularly if crude oil prices remain above $60/barrel and, or, the Naira exchange rate depreciates above the current N197=$; eventually, however, the oppressive folly of government’s subsidy strategy may become so embarrassingly glaring when we become constrained to obtain much higher priced loans to fund over the 50 percent of total annual budget allocated to subsidy.

Conversely, however, if subsidy is abolished with the prevailing crude oil price and Naira exchange rate, fuel price will rapidly shoot up to about N150/litre, and ultimately drive the average price index for goods and services closer to 10 percent. Consequently, unless all wages and salaries rise by 10 percent annually, income earners may lose 50 percent of the purchasing value of their Naira incomes every five years; thus, more Nigerians will need to cut down on their families’ standard shopping list, as all incomes increasingly lose purchasing power to deepen poverty, particularly for those families who depend on the existing minimum wage of N18000/month.  Inflation is a vicious silent plague!

Furthermore, consumer demand will contract if inflation spirals, and this will create adverse consequences for manufacturers and other employers of labour who will become compelled to scale down on their workforce; clearly, this will only worsen the already socially disturbing rate of unemployment.

In the above event, government may seem caught between the devil and the blue sea, on this matter of subsidy. Indeed, if government’s response to this persistent dilemma remains pedestrian as usual, the incoming administration would predictably seek a truce with Organised Labour to once again share the burden of subsidy, by raising the current fuel price of N87 to about N120/litre instead of the subsidy free actual market price of about N150/litre.

Regrettably, however, this arrangement will collapse, once crude oil prices rise above the current $60/barrel and, or the Naira exchange rate rises above N197/$, as such price movements will push deregulated petrol price well beyond N150/litre to create a wider margin of subsidy than the N30/litre earlier projected.

Furthermore, if CBN’s rapidly depleting reserves increase the pressure on dollar demand, Naira exchange rate would simultaneously climb closer to or above the current black market rate of N220=$. In such event, fuel prices will rise and related subsidy values will again increase to precipitate the usual train of inadequate funding, delayed payments, fuel scarcity, extended queues at petrol stations and the usual dislocation to economic and social life, until a brokered resolution between government and Labour once again sets in motion another cycle of folly, with another agreement for the accommodation of partial subsidy in fuel pricing.

Sadly, it is not generally known that almost 50 percent of our forex earnings are currently repatriated abroad as payment for imports for the 40m litres of fuel consumed daily.

Conversely, a huge reduction in such external payments, may be possible, if more refineries are built or if at least existing government’s refineries become fully operational. Nonetheless, the reality is that, even at full capacity, existing refineries may provide barely 20 percent of national requirement; besides, Turn Around Maintenance for these government owned refineries may characteristically still take forever to complete. However, even if all refineries operate at optimal capacity, the ex-refinery cost of fuel will not be significantly different from the f.o.b. prices invoiced by overseas suppliers; clearly, the price gain from deduction of freight and local charges may not exceed 10 percent off the domestic pump price in a fully deregulated market, unless we allocate crude oil to domestic refineries at a heavy discount (another subsidy through the back door!)

Consequently, if in spite of ‘surplus’ domestic production, crude oil prices rise significantly or Naira exchange rate further depreciates at any time, fuel pump price will faithfully spiral uncomfortably to still make the accommodation of subsidy inevitable. Besides, until price imposition is abolished, investors will continue to stay away from establishing new domestic refineries because of the clear challenges related to the subsidy payment scheme. However, savvy investors, such as Dangote, who plan to establish new refineries, would hedge their investments by selling their products strictly in dollars, ex-refinery gate, to marketers who would still need to source the required forex for their purchases. In such event, the forex outlay for fuel will still remain substantial despite the new private refineries established.

Conversely, however, domestic refineries would readily price their fuel in Naira and conserve foreign exchange, only if, the Naira re-establishes a reputation as a safe store of value, rather than a currency that is perennially beleaguered and remains on life support. Instructively, the Naira exchange rate will inevitably continue its slide and make abolition of subsidy a challenge so long as our domestic money market remains ‘eternally’ flush with the ever-surplus Naira deliberately instigated every month by CBN to chase rations of dollar supply from the same Apex Bank!

This is no rocket science and the incoming administration would ignore this reality at its own peril.