Rational Perspectives

January 20, 2014

Kill subsidy before it kills us!

Subsidy, NNPC

By Les Leba

This week, we will closely examine the inference of the sum of $8.9bn (about N1.4tn) that NNPC confirmed it legitimately retained as fuel subsidy between January 2012 and July 2013!

SUBSIDY-EXPRESSWe recall that the National Assembly 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.”

Reginald Stanley, the Executive Secretary of the Petroleum Pricing & Regulatory Agency (PPRA) had, consequently, happily observed that the consolidated subsidy allocation of N1.05tn in 2012 was a major improvement on the alleged controversial 2011 total subsidy of N2.09tn!

The PPRA Secretary, nonetheless,   cautioned that the consolidated 2012 subsidy value of N1.05tn did not include subsidy for kerosene; consequently, the legitimate subsidy appropriation of N1.05tn would have been inadequate, if kerosene claims are also captured!

However,  the recent confirmation by the Financial Director, Bernard Otti, that NNPC also internally additionally absorbed $8.9bn (N1.4tn; i.e. N75bn monthly) without overt legislative approval, may suggest that the actual total 2012 subsidy expenditure could possibly be closer to N3tn, more so, when subsidy claims for kerosene are also captured; thus, total subsidy outlay was outrageously over 60% of the consolidated federal expenditure budget of N4.7tn for 2012!

Thus, with possibly over N3tn outlay on subsidy and with additional interest and service charges of about N600bn for our largely unproductive borrowings, intangible and unproductive expenditure would have accounted for over 75% of total budgeted spending in 2012, even when total infrastructural expenditure, including spending for health and education, was inappropriately less than 30%!

It is worrisome that 2012 subsidy outflow 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; regrettably, however, there is no reason to believe that total subsidy expenditure for last year fell below N3tn expended annually in previous years!

Distressingly, also, there is no reason to suggest that fuel subsidy outlay for 2014 will be any different; consequently, subsidy and projected debt service charges of about N600bn, will exceed N3.6tn, compared with the relatively paltry projected total capital expenditure of N1.5tn from the total appropriation of N4.6tn this year!

Furthermore, with the naira rate of exchange 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 subsidies!

A simple example will demonstrate this reality; “if international FOB market price of PMS is, for example, $1, then by extension, 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 current official price of N97/litre.  Thus, the government may earn about N10/litre as a sales tax, rather than incur subsidy expenditure of over N40/litre as is currently the case!”

Regrettably, no increase in number of functional refineries will change this reality!  (See our article “The Avoidable Oppressive Burden of Fuel Subsidy” of November 2013, at http://lesleba.com/yahoo_site_admin/assets/docs/P-18112013.32145409.doc).

So, our economic management team may have inadvertently boxed itself into a catch 22 dilemma, as we seem incapable of reducing the price or volume of PMS and kerosene consumption, despite heavy leakages from massive cross border smuggling.

Meanwhile, government, Conversely, understandably, has 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 guarantee that naira exchange rate will never appreciate to reduce petrol prices and ultimately also subsidy values!

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

We are therefore, forewarned that, unless we “kill” fuel subsidy, fuel subsidy payments may ultimately “kill” us!  The choice, therefore, is, should Nigerians endure abject poverty in spite of increasing wealth 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 totally eliminate subsidy as per the earlier example?

Indeed, further progressive evolution of naira exchange rate upward to around N80/$1, will expectedly, not only eliminate fuel subsidy, but will also enable our government just like in the UK and US, 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!

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, inactive on this reform; particularly more so, when there is a  real possibility that our current oil revenue inflow can induce a stronger naira and precipitate much lower fuel prices, devoid of a subsidy component, if the dollars from crude oil sales are infused into the domestic economy with dollar certificates rather than the current poisonous system of creating fresh naira supplies as substitutes the distributable dollar revenue every month!