Killing me softly with subsidies

on   /   in Rational Perspectives 12:10 am   /   Comments

By Les Leba

One of the decisions taken by the National Assembly before the Christmas break was the appropriation of an additional sum of N161.6bn to augment the initial N888.1bn voted for subsidy in the budget of the outgoing year.  This would bring total fuel subsidy claims for 2012 to over N1.05tn; i.e. the equivalent of over 20% of the 2012 expenditure budget of N4.7tn.  The budget allocation of over N500bn for interest and service charges for domestic debt comes a distant second to fuel subsidy.

The Executive Secretary of the Petroleum Pricing & Regulatory Agency (PPRA) has defended the additional requirement for N161bn fuel subsidy as in order, and noted that the N888bn initially approved included arrears of N451bn from processed 2011 claims!  In any event, PPRA’s Reginald Stanley also observed that the consolidated allocation of N1.05tn in 2012 budget was a major improvement on the alleged total subsidy payment of N2.09tn in 2011.

However, the PPRA boss confirmed that “the processed claims up to July 2012 for P.M.S. alone stood at N605bn, and exceeded the approved balance of N437bn after the deduction of arrears from 2011”. (Punch 18/12/2012, pg. 23).

Indications are that subsidy payments for kerosene, according to the PPRA, may not have been captured in the already processed claims of N605bn!  Consequently, when ultimately approved, kerosene subsidy up to July 2012 may also notch up another N605bn as kerosene claims historically, regularly exceed subsidy payments for P.M.S.

Thus, processed claims for P.M.S. and kerosene may probably have surpassed N1.2tn by July, and may ultimately exceed N2.4tn by December 2012.

So, in spite of the presumed “thorough and extensive audit” of claims, total subsidy payments for 2012 would be higher than the contentious 2011 figure of about N2tn and may account for over 40% of the 2012 expenditure budget!!  Indeed, the N161bn for which fresh approval was sought in mid December 2012 may just be the tip of the iceberg, as the N437bn cash backed processed claims and this fresh appropriation only add up to about N600bn, whereas processed claims for P.M.S. alone already exceeded N605bn by July 2012.

Certainly, the Federal Executive would again inevitably come up early in the first quarter of 2013 with a bill seeking approval for hundreds of billions of naira more to pay for arrears of 2012 processed claims!!

The revelations from the National Assembly hearings confirmed that kerosene subsidy values may account for the lion’s share of subsidy payments.  Nonetheless, it is generally easier to purchase P.M.S. at the official price of N97/litre than to purchase kerosene at the official price of N50/litre!

The Standard Organisation of Nigeria recently revealed that unscrupulous marketers now adulterate diesel with subsidised kerosene, and similarly sell the domestic purpose kerosene as aviation at much higher prices.

Ultimately, it would appear that subsidy imbroglio and heavy social burden would only be averted if crude oil prices fall, as this would reduce the landed cost of both kerosene and P.M.S. respectively.  But this is a prayer that is counterproductive, as our foreign earnings would automatically be depleted rapidly; in any such event, with negative impact on naira exchange rate.  Meanwhile, a weaker naira would further pump up the domestic price of fuel!!

In addition, any significant drop in export revenue as a result of tumbling crude oil prices may also instigate a bigger appetite for government borrowing to supplement revenue shortfalls; such loans, inevitably come with an attendant oppressive interest rate burden.

Conversely, while higher crude prices would benefit the economy, they would also increase the domestic fuel price and inadvertently increase subsidy values above current annual average of over N2tn.  Ultimately, we may need to dedicate over 50% of total expenditure budget for subsidy payments alone!

However, in reality, this apparent no win situation needn’t be so, if crude dollar earnings are infused directly into the economy with the instrument of dollar certificates.  The prevailing system of substituting bloated naira sums for dollar earnings instigates the disruptive ‘eternal’ cash surfeit, which instigates heavy government borrowing, high rate of interest and inflation, and a weaker naira, all of which support rising fuel prices, which make subsidy inevitable.

Indeed, our export revenue will increase and make naira stronger as crude oil prices rise, under a reformed payment model, which adopts dollar certificates; a stronger naira will depress domestic pump price of fuel!  In this manner, fuel prices will ultimately fall below the current N97/litre, such that government could raise additional revenue from fuel sales tax/litre, just like other oil producing countries such as the US and UK.

Conversely also, with a reformed payment system, when crude prices fall, domestic fuel prices will similarly fall and still make subsidy payments unnecessary, since prices are falling anyway!!

Merry Xmas!

SAVE THE NAIRA, SAVE NIGERIANS!!

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