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Kill subsidy before it kills us!

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By Henry Boyo

The Minister of State for Petroleum Resources, Ibe Kachikwu noted, recently that government’s annual expenditure on fuel subsidy has risen to over N1.4 Trillion, primarily because of the proliferation of illegal petrol stations and tank farms in close proximity to Nigeria’s borders with her ECOWAS neighbours.

The above title was first published in January 2014. A summary of this piece follows hereafter. Please read on:

“This week, we will closely examine the implications of the sum of $8.49bn (about N1.4tn) that NNPC confirmed that it retained legitimately as fuel subsidy between January 2012 and July 2013!  We may recall that the National Assembly had approved “an additional sum of N161.6bn to augment the initial N881bn voted for subsidy in 2012; thus, total fuel subsidy approved for 2012 was presumed to be about N1.05tn (i.e. more than 20% of the total budgeted expenditure of N4.7tn) for that year.”

*File photo: Fuel sold in black market

Inspite of the above oppressive outlay on subsidy, Reginald Stanley, the Executive Secretary of the Petroleum Pricing & Regulatory Agency (PPRA), has elatedly observed, in media reports, that the N1.05tn consolidated subsidy appropriation in 2012 was a major improvement on the highly controversial total subsidy of N2.09tn in 2011!

The PPRA Secretary, however, cautioned that the 2012 subsidy outlay of N1.05tn did not include subsidy on kerosene; consequently, total subsidy would exceed N1.05Tn, if kerosene claims were also captured!  However, the recent confirmation by the Financial Director, Bernard Otti, that NNPC, additionally, internally, also absorbed $8.9bn (N1.4tn; or N75bn monthly) without overt legislative approval, may suggest that the total actual  subsidy expenditure  for 2012 could possibly be closer to N3tn, especially, when subsidy claims for kerosene are captured.  In this event, total subsidy outlay may have been, outrageously, equivalent to over 60% of the total federal expenditure budget of N4.7tn in 2012!  Consequently, if possibly, well over N3tn is frittered on subsidy, in addition to interest and service charges of about N600bn paid on Central Bank’s largely unproductive borrowings are also captured, this would imply that the equivalent of over 75% of total budgeted spending were simply applied to intangible and unproductive objects in 2012, even when total actual infrastructural expenditure, including allocations for health and education, was inappropriately below N1.3Tn.

It is therefore, worrisome that, in 2012 subsidy payments may have exceeded the seemingly outrageous 2011 value of N2.09tn! Incidentally, fuel subsidy projections were not overtly captured in the actual text of the 2013 budget; nonetheless, there is no reason to believe that total subsidy expenditure for 2012 actually fell below the N3tn, allegedly, expended annually in previous years!  It is distressing, also, that fuel subsidy outlay for 2014 will not be any different; consequently, subsidy, Federal government and CBN’s projected debt service charges of about N600bn, may exceed N3.6tn, in sharp contrast to the relatively paltry projected total capital expenditure of N1.5tn in the legislated budget of N4.6tn in 2014!

Furthermore, with naira exchange rate currently under severe downward pressure, subsidy claims alone, may actually exceed N3tn in 2014.  This is because, naira exchange rate depreciation has, historically, been the real driver of domestic fuel prices and ultimately rising subsidy values!  A simple example will demonstrate this reality; “if international FOB market price of PMS is, for example, $1, then by extension, with $1=N160 in 2013, this would be equivalent to N160/litre (plus about 10% for freight and port charges)!  On the other hand, if the naira exchange rate falls to N200=$1, while official pump price remains at N97, this would imply that the naira subsidy component must increase!

“Conversely, if the naira exchange rate strengthens to N80=$1, for example, this implies that PMS would similarly sell at N80/litre plus freight and clearing charges; i.e. well below the existing official price of N97/litre.  Consequently, government will earn about N10/litre as sales tax, rather than a subsidy expenditure of over N40/litre as is currently the case!”  Regrettably, no increase in the number of functional refineries will change this reality! (See “The Avoidable Oppressive Burden of Fuel Subsidy” (www.lesleba.com)

Consequently, our economic management team may have inadvertently boxed itself into a dilemma, as we seem incapable of reducing the price of PMS and kerosene consumption, despite the very heavy leakages from massive cross border smuggling.  Meanwhile, government, has understandably, shied away from another confrontation with the masses, particularly after it survived the charged and volatile social tension, of the January 2012 pro-subsidy strike!  Worse still, the unyielding burden of systemic cash created by CBN’s substitution of fresh naira supply for dollar revenue will always guarantee that naira exchange rate will remain challenged, and petrol prices will therefore never fall and erode the related erstwhile subsidy values!

In this event, we may not require a soothsayer to correctly predict, as I have consistently maintained, that inclusive economic growth, with rapidly enhanced social infrastructure will remain clearly unattainable, so long as rising debt service charges and fuel subsidy payments continue to account for the lion’s share of budgeted annual national expenditure!

We must therefore, be forewarned that, unless we “kill” fuel subsidy expenditure, unrestrained fuel subsidy payments may ultimately “kill” us!  The choice, therefore is, should Nigerians endure abject poverty despite increasing wealth accommodation for our serial economic predators or are we ready to resolutely demand that only policies that would bring about salutary mass social welfare are pursued?  Are we ready to embrace such change with the adoption of a monetary payments strategy that will induce a stronger naira exchange rate below N97/$1 i.e. the rate of exchange that would presently totally eliminate subsidy as per earlier example explained above?

Indeed, a progressive upward evolution of the naira exchange rate to around N80/$1, will expectedly, not only eliminate fuel subsidy, but will also enable government, just as in the UK and elsewhere, to earn a minimum sales tax of about 10% per litre; i.e. minimum revenue of over N350m/per day, in place of N40/litre subsidy for the 35 million litres of fuel allegedly consumed and smuggled from Nigeria daily!

Consequently, in view of the increasingly suicidal impact of fuel subsidy payments on our economic growth and social welfare, no well-meaning Nigerian can sincerely stand on the sideline, especially if President Jonathan and the legislature remain, unfortunately, lethargic about this reform; particularly, when there is a  real possibility that our present oil revenue inflow can induce a stronger naira rate and actually precipitate much lower fuel prices, devoid of any subsidy component, if the dollar revenue from crude oil sales are infused into the domestic economy via dollar certificates warrants, rather than the current poisonous system of creating fresh naira supplies as allocations for distributable dollar revenue every month!”

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