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Furore over oil subsidy removal

By Our Reporter
LAGOS—The planned subsidy removal by the federal government next year has sparked off mixed reactions from Labour, Organised Private Sector and the Central Bank of NIgeria (CBN).

While some operators in the organised private sector welcomed the development saying it is long over due, Labour on its part said it will hurt the economy and vowed to resist the move. Those who are for the removal have said that subsidy has caused a lot of distortion in the Nigerian economy and has denied the nation the needed investment in refineries.

CBN Governor had in Washington said that subsidy removal will pose a challenge to monetary policy authority due to its inflationary impact in the short run. He said “though the Ministry of Finance has plans to rein in government spending, it can only be realised in the medium to long term. He said in practice fiscal retrenchment cannot hold in the short term”.

According to him, “the monetary authority has been battling with excess liquidity which is causing inflation and undue pressure on the exchange rate of the naira and interest rates”.  He said that “subsidy removal though desirable, will pose a great challenge to monetary policy authority because in the short run, the immediate impact of the removal will be on prices of goods and services. This he said has the potential of pushing up prices of goods and services in the country. He said in the interest of the economy and the nation, there is the urgent need for greater collaboration and coordination between fiscal and monetary authorities to deliver better policies to move the economy forward.

Following the plans by the Federal Government to completely withdraw subsidy on petroleum products, private sector operators admit that Nigeria spends about N72.8bn monthly on petrol subsidy. According to the pricing template of the Petroleum Product Pricing Regulatory Agency as at August 15, 2011, the landing cost of a litre of petrol is N129.21; the margin for transporters and marketers is N15.49; the expected pump price is N144.70; while the official pump price is N65.

This means that the FG pays N79.70 as subsidy on each litre of petrol consumed in the country. With about 32 million litres of petrol consumed daily across the country, it also means the government is paying about N2.6bn as subsidy every day, which translates into N18.2bn per week and N72.8bn per month.

The country currently imports most of its petrol with the refineries all working far below capacity. Nigeria has an installed crude refining capacity of 445,000 barrels per day but the refining output is insignificant when compared to the national demand.

Lagos Chamber of Commerce and Industry President Otumba Femi Deru in a position paper said: “The Lagos Chamber of Commerce and Industry, is even more worried over the horrific cost of sustaining the current system especially through the following channels: Subsidy on imported petroleum products, which runs into hundreds of billions of Naira through the Petroleum Support Funds (PSF); Colossal sum of taxpayers’ money spent on the bridging of petroleum products through the Petroleum Equalization Funds (PEF); Profound integrity and transparency issues associated with the management of subsidies, the bridging funds and the refineries.

“This spending pattern poses very grim consequences for the economy. Worse still, most of the expenditure were not appropriated by the National Assembly. It is a major economic governance challenge. In the light of the foregoing, the following steps should be taken to ensure a virile and sustainable downstream oil sector: An exit strategy for all public enterprises should be immediately worked out to stop them from direct production, procurement, distribution and marketing of petroleum products; the Petroleum Equalization Fund should be scrapped; There should be creative incentives for the private sector to set up refineries both for domestic consumption and for export; private sector agencies should be engaged to manage and maintain the pipelines; The refineries should be immediately privatized, with labour issues adequately addressed; The NNPC should disengage completely from retailing petroleum products. The ongoing acquisition of retail outlets by the NNPC is totally inconsistent with the proposed reforms in the sector. Retail outlets, is the least of the problems in the sector. The commitment of public funds to the acquisition of retail outlets is absolutely unacceptable; there should be a strong regulatory institution with clear guidelines to guide investors in the sector and protect the interest of the consumers.

The outcome of the adoption of the foregoing is greater private investment in refineries, procurement, distribution and marketing of petroleum products in the economy. Also, the economy would save the huge sums of money currently being disbursed as subsidy and bridging funds and be rescued from the massive rent seeking activities and economic parasites in the downstream sector.”

Dr. Simon Chukwuemeka Okolo immediate past President of NACCIMA said “We support real deregulation that will increase private sector participation in the down stream oil sector not government increase of pump price.”


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