By Henry Boyo

The data released on fuel subsidy outlays from responsible Agencies of government 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 payments is a continuous, rolling process, therefore, relevant government agencies could only provide specific data relating to approved claims that have passed through each department 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 about N500bn, or an average of about 10% of annual Federal budgets 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 you are already concerned at the apparent misplacement of priorities, then you may be alarmed, that actual subsidy values may have exceeded 20% of total Federal budgets in recent years. This is because, in addition to the N500bn or so average actual subsidy payments annually, the value of unsettled bills may approach or indeed exceed another N500bn annually.

Infact, according to the Co-ordinating Minister, subsidy values, which were never captured in annual appropriation bills, have nevertheless been settled ultimately by her 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, is not clear.

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

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

Conversely, however, if subsidy is abolished under the prevailing crude oil price and Naira exchange rate, fuel price will rapidly shoot up to about N150/litre, and ultimately push the average price index for goods and services closer to 10%. Consequently, unless all wages and salaries rise by 10% annually, income earners may lose 50% 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 incomes increasingly lose purchasing power and deepen poverty, particularly for those families who depend on the existing minimum wage of N18000/month. Furthermore, consumer demand will contract if inflation spirals to create adverse consequences for manufacturers and other employers of labour who will become compelled to scale down on their workforce; clearly, this will further worsen the already socially disturbing rate of unemployment.

Thus, government may seem to be 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 a subsidy free actual market price of about N150/litre.

Regrettably, however, this arrangement will collapse as soon as 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 pressure on dollar demand, Naira exchange rate would simultaneously spiral 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, etc, etc, until a brokered resolution between government and Labour once again sets in motion another cycle of folly with an agreement for partial subsidy in fuel pricing.

Sadly, it is not generally known that almost 50% 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 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% of national requirement; besides, Turn Around Maintenance for these refineries may characteristically still take forever to complete.

However, even if refineries operate at optimal capacity, the ex-refinery cost of fuel will not be significantly different from the f.o.b. prices invoiced by the overseas suppliers; clearly, the price gain from deduction of freight and local charges may not exceed 10% off the domestic pump price in a fully deregulated market, unless crude oil is allocated to refineries at a heavy discount (another subsidy through the back door)!

Consequently, if crude oil prices rise significantly or Naira exchange rate further depreciates, fuel pump price will faithfully spiral uncomfortably to 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 payments system of the present subsidy scheme.

However, savvy investors, such as Dangote, who 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, owners of domestic refineries would readily price their fuel in Naira 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 continue its slide and make abolition of subsidy a challenge so long as our domestic money market remains eternally flush with ever-surplus Naira deliberately instigated by CBN every month to chase the rationed dollar supplies from the same Apex Bank!