June 4, 2023

The Tinubunomics’ Twins: Teriba, Yusuf, other top economists react

Fuel subsidy removal

By Tunde Oso

Petrol subsidy removal, unified forex regime should have taken off together — Teriba, economist

Prof Ayo Teriba, CEO of Economic Associates (EA), weighs in on the move by President Bola Tinubu to lift the economy through petrol subsidy removal and unified foreign exchange:

The government has taken the bull by the horn. At the moment, the NNPC has announced a new fuel price regime. There’s a strong national consensus that subsidy on fuel has to go. It has become inevitable. And there’s never going to be a good time than now. Even the NLC, TUC are not opposed to it as they have reached an understanding with the immediate past regime on this and this is why the then Federal Government went to the World Bank for the $800million loan to mitigate the consequences. Labour’s grouse is about which comes first: the palliatives before the removal or the other way round, as it has happened. What it needs to do now is to appease the Labour by mitigating the impact on workers and vulnerable Nigerians.

All over the world, there are always deliberate government policies targeted at improving the lives of the poor members of the society. So, government should set in motion the mitigation of the consequences of the petrol hike. I wonder what is delaying government unification of the foreign exchange regime.

The present government, even if it was unable to begin both simultaneously, should have 48 hours after implemented the unification of the forex regime because it would have implications on the other: i.e., the fuel price. The two are interconnected. Even as the NNPC has released a price regime, why did the CBN not announce the unified rate? A unified exchange rate could cause the devaluation of the Naira. Whereas if he does, we hope the NNPC would not come back to tell us that it wants to review its price regime again. So, there’s need for government to have started the two policies simultaneously because one would have influence on the other.

Unified exchange rate shouldn’t lead to Naira devaluation – Muda Yusuf

Dr. Muda Yusuf, Chief Executive Officer, Centre for the Promotion of Private Enterprise [CPPE], warns against unified exchange rate leading to Naira devaluation. His words: “Admittedly, the increase was quite high. And the shock on citizens was enormous as well. But these are some of the inevitable costs of reforms. And we need the reforms to prevent the collapse of the economy. Apparently things have to get worse before it gets better. It would be painful initially, but it would progressively get better. As the supply side response improves, the prices will moderate.

That said, government needs to urgently put immediate and short-term measures in place to mitigate the pains of the sharp increases in transportation costs on the citizens. Food and transportation account for over 50% of household budget of the poor.

Something urgent needs to be done. Such measures should focus on reducing the cost of food, provision of cheaper public transportation options, improving power supply to reduce demand for fuel for electricity generators, incentives to promote the use of autogas, reduction in import tariffs for intermediate products for food processing companies, eliminating taxes and levies on all agricultural inputs to boost food production and reduction in import tariffs on mass transit buses, among others. NNPC PMS pricing should be at least 15% less than the prices of private fuel stations. This is necessary to signal social sensitivity by the government.

Fuel subsidy removal has enormous potential benefits. First, there is the revenue effect. The removal would unlock about N7 trillion into the federation account. This would reduce fiscal deficit, and ultimately ease the burden of mounting debt. Second is the investment effect. Currently, it is extremely difficult to attract private investment into our petroleum downstream sector because of the unsustainable subsidy regime and the stifling regulatory environment. The subsidy removal will eliminate the distortions and stimulate investment. We would see more private investments in petroleum refineries, petrochemicals and fertilizer plants.

Post-subsidy regime would also unlock investments in pipelines, storage facilities, transportation and retail outlets. We would see the export of refined petroleum products petrochemicals and fertilizer as private capital comes into the space. Quality jobs will be created. There is a foreign exchange effect. This would result from the import substitution as petroleum products importation progressively decline. This would conserve foreign exchange and boost our external reserves. An increase in investment would translate into more jobs in the petroleum downstream sector. The smuggling of petroleum products across borders will come to an end with a market pricing of refined products.

Meanwhile, we need to put an end to NNPC monopoly in the supply of petroleum products. Competition is imperative for subsidy removal to be sustainable. Private sector players must have access to foreign exchange to import, pending the commencement of domestic refining operations. There must be palliatives which should be segmented into immediate, short term and medium-term deliverables. Immediate and short-term options include wage review in public service, the introduction of subsidized public transportation schemes across the country and reduction in import duties on intermediate products for food-related production to moderate food inflation.

In the medium to long-term, there should be accelerated efforts to upscale domestic refining capacity, driven by private investments; accelerated investments in rail transportation by government to ease logistics of fuel distribution across the country as well as domestic freight costs. It should be clarified that this is not a devaluation proposition. Rather it is a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market which allows for rate adjustments as and when necessary.

It is a model that is predictable, transparent and sustainable. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It is a policy framework that would minimize discretion and arbitrage in the foreign exchange allocation mechanism. A unified exchange rate regime offers the following benefits for the economy:

i. It enhances liquidity in the foreign exchange market:

ii. It reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors.

iii. It is more transparent as a mechanism for forex allocation.

iv. It minimizes discretion in the allocation of forex and reduces corruption vulnerabilities.

v. It reduces opportunities for round-tripping and other sharp practices.

The current foreign exchange policy regime on the other hand creates multiple exchange rates and results in the following distortions and negative outcomes:

i. Widening gap between the official and parallel market exchange rates which allows forex round-tripping to flourish.

ii. Collapse of liquidity in the foreign exchange market resulting in acute forex scarcity.

iii. It fuels demand for forex because of the incredible rent opportunities created by the huge parallel market premium.

iv. Creates a major disincentive for forex inflows into the economy, thus suppressing forex supply.

v. Mounting trade debts.

vi. Increasing factory closure as many manufacturers are not able to access foreign exchange for raw materials and other inputs.

vii. Many investors are not able to meet offshore obligations creating credibility problems with their offshore suppliers.

viii. Mounting inflationary pressures

ix. Sharp drop in capital inflow

Tinubunomics: Our concerns on strategy, by CSJ

Centre for Social Justice (CSJ) says it is deeply concerned about President Tinubu’s decision to remove petrol subsidy without engagement and consultation with stakeholders.

“While CSJ has long advocated for the removal of PMS subsidy, the abruptness and lack of transparency surrounding this announcement raises several critical questions and potential consequences for the citizens of Nigeria”, the body said in a note to Sunday Vanguard signed by Eze Onyekpere, Lead Director, and Victor Okeke, Strategic Communications Officer.

The note reads: “We recall President Bola Tinubu’s inaugural speech on May 29, 2023, in which he declared the end of petrol subsidy. “Subsequently, the Nigerian National Petroleum Company Limited (NNPCL) announced an upward review in the pump price of PMS across the nation, effective from May 31, 2023.

“CSJ recognizes the need for sustainable economic policies and applauds efforts to address the issues related to petrol subsidy. “However, the current manner in which the removal of subsidy has been carried out raises significant concerns that demand urgent attention.

“First, the lack of public consultation and agreements that should accompany the reform package including palliatives for the poor, cutting down the cost of governance, the fate of the public refineries, etc., prior to the removal of the subsidy is troubling. It is very important that decisions of this magnitude, which directly affect the lives of citizens, are made through inclusive and participatory processes, ensuring that diverse perspectives are taken into account.

“Additionally, the lack of transparency and clarity in the computation of the new fuel prices circulated by NNPCL is disturbing. CSJ urges the government to provide a comprehensive breakdown of the cost components and the basis for the calculation of the new fuel price. “This information is vital for the citizens to understand the rationale behind the price adjustment.

“Furthermore, the sudden removal of petrol subsidy without a clear plan to mitigate the potential adverse effects on the already burdened citizens will exacerbate their suffering. The cost of living has already been a significant challenge for many Nigerians, and this decision has the potential to further escalate the financial burden on households across the country.

“We also question the willingness of the political class to make corresponding sacrifices in terms of reducing the cost of governance, including their illegitimate and consistent earnings outside the approval of the Revenue Mobilisation Allocation and Fiscal Commission. Without this demonstration of commitment, the burden of subsidy removal will disproportionately fall on the already struggling citizens.

“CSJ calls on the government to provide clarity on how the funds saved from the subsidy removal will be reinvested for the benefit of the citizens.

“It is crucial that these resources are allocated to essential sectors such as healthcare, education, infrastructure development, and social welfare programs to alleviate the adverse impact of subsidy removal.

“The arbitrary nature of this subsidy removal sends a dangerous signal of potential dictatorship and a lack of openness and transparency in the conduct of government affairs. CSJ strongly emphasizes the importance of democratic values, including transparency, accountability, and public engagement, in all policy decisions.

“CSJ stands ready to engage with the government, relevant stakeholders, and civil society organizations to address these concerns and ensure that the removal of petrol subsidy is carried out in a just and equitable manner that prioritizes the welfare of the citizens”.

Adedipe to Nigerians: Be more realistic about lifestyle, choices

Dr. ‘Biodun Adedipe, Chief Consultant of B. Adedipe Associates Limited (BAA Consult), on his part, said subsidy removal is a legal issue, already so provided in the Petroleum Industry Act that specifies removal 18 months from January 2022 and the FGN Appropriation Act 2023 that provided for subsidy up until June 2023.

Adedipe’s words: “President Tinubu’s declaration was simply to bring Nigerians and the country’s stakeholders to that reality that it had been removed (legally) by the previous administration and, therefore, no longer an issue for his government to deal with.

“The conversation is not the removal but its implications and what the government and the rest of us should do.

“No doubt, an increase in the pump-head price by 163.8% to 201.1% will cause an increase in the cost of living and the cost of doing business – a new inflationary pressure resulting in markup in commodity prices.

“More share of the wallet goes to transportation for the low income populace whose logistics needs (to work and markets) should be met by low-capacity, petrol powered vehicles and extra-grid power needs by small-capacity generators, leaving less of their disposable income for other needs.

“That will deepen poverty and misery. Running cost escalation can also result in business closures, especially for nano enterprises and the smallest of the SMEs. That, of course, will compound unemployment and all the vices traceable to it.

“Similarly, if we mistake unified exchange rate for devaluation (and they mean different things), we are also asking for economic trouble.

“Unified exchange rate by the CBN, in my view, is for the apex bank to have the same rate for all transactions funded at the official window, which has adopted the market-determined rate at I & E FX window.

“Devaluation will have a worse devastation than fuel subsidy removal, as evidenced in our historical macroeconomic data. We started fuel price correction in 1966 and exchange rate correction in 1986 – not one incident of such has brought enduring benefits to the Nigerian economy and Nigerian people.

“In my opinion, the right question on fuel subsidy is to ask NNPC what it has been doing with the daily crude oil allocation of 450, 000 barrels of crude oil for domestic consumption while racking up the humongous subsidy numbers.

“My final take on these issues are for governments (Federal, State and Local) to invest massively and quickly in mass transit system and sustain this in line with our population growth and urbanisation rates.

“Also, there should be intensified investment in infrastructure (directly where feasible and through PPP) in order to reduce logistics costs and risks.

“The Federal Government should have a firm agreement extracted from Dangote Refinery to commit to a stable price range for its refined products – after all, it will have crude at lower than international price (at least, the price will exclude freight and other logistics/handling costs associated with imported products as well as FX).

“For Nigerians, it is a time to get more realistic about lifestyle and choices, giving more attention to necessaries and avoiding frivolous spending”.

Failure to follow through with unification may lead to deficits – Olusoga

Managing Director/CEO, Parthian Partners Limited, Seye Olusoga, urged the Tinubu government to make the unification process swift to achieve good results.

Olusoga said: “Unifying exchange rates is a difficult task that must be done and would require courage to achieve. An attempt to unify the exchange rates in Nigeria would imply some level of official devaluation. However, it would also bring additional benefits.

“Once the rates converge, there will be a better flow of money and reduced arbitrage concerns.

“Rather than a gradual approach, the process should be market-driven.

“To achieve this, Nigeria should increase its daily oil production for exports and diversify into sectors such as mining to generate foreign exchange. The Central Bank can act as a regular market participant, trading excess dollar supply to meet demand. The laws of supply and demand would help stabilize the market

“As a former President of the World Bank Group once said, a slow unification process often results in no unification at all due to pushback and vested interests.

“Therefore, the unification process should be swift rather than gradual.

“Although it may be painful, the impact might not be as severe as anticipated. For example, if the country were to announce a free float exchange rate of N780 or N760 per dollar, the rate would quickly drop to around N700 because people would stop hoarding.

“Furthermore, when prices are accurately determined, the law of supply and demand can help stabilize the market.

“This would allow us to shift our focus towards real production and functioning markets, presenting opportunities for everyone.

“As people start to witness positive changes in the market, such as the appreciation of the Naira when oil prices drop, they will gain confidence in the functioning of the market.

“Imposing restrictions or defending the currency through measures like tightening the number of items or maintaining subsidies hampers market efficiency and fair distribution of resources.

“Subsidies, primarily, benefit the wealthy rather than the average person. By eliminating subsidies, individuals can make wiser decisions and optimize their resources, leading to better outcomes.

“For instance, families with multiple cars for routine tasks within a small radius could consolidate their transportation to reduce traffic and expenses.”

Unified rate will establish real value of Naira – Adonri

Vice Chairman, Highcap Securities, David Adonri, said unification would eliminate scarcity of foreign currencies and round tripping from the FX market.

Adonri words: “Unification of exchange rate means a single exchange rate for any foreign currency, determined by market forces just like the price of a listed stock, is determined by market forces on the exchange.

“Market mechanism will guarantee the availability of the foreign currency thus eliminating scarcity. Whoever sells at the market rate enjoys the full value of the currency. If the government sells at a market rate, its domestic revenue will increase.

“Market-determined exchange rate will eliminate arbitrage where a person with a connection can buy at a low official rate and sell in the parallel market without adding any value to the economy. This is also called round-tripping or rent.

“Market mechanism will efficiently allocate hard currency to competing needs in the economy. Current multiple exchange rates characterized by the administrative method of allocation by the Central Bank of Nigeria, CBN, fuels corruption and exacerbates rent which adds no value to the economy except to benefit a few connected individuals.

“Finally, a market-determined exchange rate will enable users of hard currency to forecast and plan more correctly for their future needs.”

Investors will have access to Nigerian market – Kurfi

Managing Director/CEO, APT Securities and Funds Limited, Mallam Garba Kurfi, said once there is a convergence of the exchange rates, foreign investors will begin to access the Nigerian market. He said: “It is a welcome development as this is what deters foreign investors from coming into the country.

“How do you expect an investor, who bought his forex and exchanged at CBN rates but cannot get the same rate when he wants to exit, to continue to invest in your market?

“Once there is unification, there will be more availability of FX and it will encourage inflow of foreign exchange.”

  • Additional report by Nkiru Nnorom