By Henry Boyo

‘THE most important  question now is: For how long must misguided government economic policies ruin our nation while we do nothing? This year like others has only twelve months. At least five will be spent with nobody thinking about how to prevent more deterioration. The remaining seven months cannot possibly reverse the accumulated damage – unless a new and radical solution is found”. An excerpt from ‘As Dangote goes, so does Nigerian economy’ by Dele Sobowale, Vanguard Newspaper on Monday, January 21, 2019.

*File photo: Fuel sold in black market

Oil prices rise to $58.04 amid US-China trade hopes, supply cuts

The above quote is probably synonymous with the popular definition of insanity as “the continuous repetition of the same process with the same wrong results, and still expect a positive difference at each turn.”

Regrettably, it is much easier to identify several policies, in which results are not congruent with the declared objectives of government. However, the continuous sustenance of fuel subsidy, probably stands out as one of the most distortional, counter-productive policies, which induce socially and economically destructive outcomes for our country.

Admittedly, the abolition of subsidy will immediately spike fuel price from the regulated current pump price of N145/litre ($0.5litre) to between N305-360/litre (about $1.0/litre), to match the prevailing price range in Ghana, Togo, Benin, Cameroon, etc,. However, the pass through impact of doubled petrol price, on transportation and ultimately, on the general price level of goods and services, would clearly be traumatic for most income earners. Predictably, therefore, the expected economic benefit from the imminent increase in the minimum wage, will similarly become, diffused by the compounded inflationary impact of higher fuel prices and the almost doubled nominal incomes of workers. Furthermore, there are genuine concerns that if petrol pricing is totally deregulated, domestic fuel price will invariably climb, especially if crude oil price rises further, or indeed, if Naira rate, unexpectedly, also depreciates, even if CBN’s consolidated foreign reserves increase, as a result of rising crude oil price and output.

It is arguable, therefore, that the trigger of higher petrol prices and the impact of the imminent minimum wage increase, will ultimately, rapidly fuel inflation, constrain consumer demand to increase unemployment and deepen poverty.

It is no wonder, therefore, that higher fuel prices, often, spontaneously pitches government against the people; furthermore, higher fuel price is predictably also the precursor to higher price for bread, and the public angst against such a combustible inflationary mix, may ultimately pose great threat to any government. It is for this reason that governments everywhere, reluctantly raise fuel price, until push actually comes to shove, when increasing annual budget deficit and steeply rising debt, compel them to bite the bullet of hiking fuel price.

There is so far no known study of the opportunity cost of sustaining the subsidy regime, in fuel price, over the years in Nigeria; nonetheless, a report of such evaluation would most certainly be gruesome and alarming. For example, in 2017 alone in the absence of meaningful output from government’s refineries, Nigeria reportedly imported almost 23 billion litres of petroleum products worth well over N3tn (about $10bn). There are, however good reasons to believe that there is significant cross border smuggling of Nigeria’s petrol imports, because of the considerable difference of almost $0.50cent/litre between petrol price in Nigeria and elsewhere in our ECOWAS neighbour States. In this regard, Senate President, Bukola Saraki, raised an alarm, in a recent Press interview, in January 2019, challenging official reports of daily fuel consumption rates of 40-50 million litres, in place of the steady 25-30 million litres/day, reportedly, consumed for most of the last decade or so.

Incidentally, the NNPC MD, Maikanti Baru, had also expressed similar concern, last year, when he publicly decried the proliferation of over 2000 petrol stations and tank farms within a few kilometers from Nigeria’s borders. Baru, consequently, visited the Comptroller General of Customs and enjoined the Service to seriously strategise on stopping wholesale smugglers of Nigeria’s fuel imports, and thereby halt the heavy hemorrhage of well over $1bn annually from our treasury.

It is clearly disturbing that despite Nigeria’s significant, recurring, annual budget deficit, with the related huge debt burden and more expensive borrowing plans in the pipeline, the economies of our ECOWAS neighbour States may possibly still freely enjoy upto 50 % of the estimated, over N1tn ($3bn), that Nigeria reportedly, expends on subsidy values annually!

Incidentally, it is on record that fuel was sold in this country for as little as 6kobo/litre without subsidy between 1966-1975 and sold below N1.00/litre until 1993. In retrospect, fuel subsidy crept into our economic lexicon, as a result of massive Naira devaluation between 1995-93, and thereafter. In other words, the real driver of fuel price is most probably, the Naira exchange rate; weaker Naira rates will predictably, produce higher petrol prices while, stronger Naira exchange rate will conversely induce lower fuel prices. Consequently, unless the Naira exchange rate improves, it will clearly remain a challenge to bring down fuel price and successfully restrain inflation and also stop fuel smugglers.

Admittedly, the popular belief, is that petrol price will fall, particularly, when crude oil price also falls, but this is not necessarily so; in Nigeria’s experience, lower crude prices may actually sustain much higher fuel prices, particularly, if the Naira exchange rate continues to slide. In practice, the Naira exchange rate will invariably depreciate, under the present arrangement whenever, crude price and output fall to deflate CBN’s caché dollar reserves.

Ironically, Naira exchange rate will still fall, even if crude oil price/output increase to pump up the size of CBN’s dollar reserves, so that, more dollar revenue ultimately, become available for substitution, with “criminally” bloated Naira allocations which will, invariably, weaken the Naira exchange rate in a market, where CBN still consistently auctions small rations of dollars twice weekly, as the process which determines the operative Naira/dollar exchange rate. Thus, it is easier to see the CBN as the Father Protector of the dollar rather than its own Naira!

Nonetheless, CBN Governor Godwin Emefiele is clearly optimistic that the commissioning of Dangote’s 650,000 barrel capacity/daily refinery complex in the Lekki Free Trade Zone, next year, would reduce pressure of dollar demand for petrol imports by possibly over $10bn annually. Consequently, Emefiele hopes that, once the refinery and petrochemical complex are up and running, the Federal Government and other forex users including bankers and importers will begin to source forex from the Dangote Group.

This may indeed be so, but there is no realistic permutation of how forex availability from Dangote will strengthen the Naira exchange rate and bring down fuel prices. In reality, so long as the CBN continues to determine the Naira exchange rate by auctioning rations of dollars in a market, that is admittedly, seemingly eternally flooded with surplus Naira supply, the Naira rate will remain weak, and petrol prices will continue to rise and ultimately compel a need for provision of fresh subsidy in petrol pricing.

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Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.