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Economists divided over proposed removal of fuel subsidy …

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…don’t take it away, let it remove itself –  Boyo

protester

Protesters demonstrating against subsidy removal by the government

 

 

OREDOLA ADEOLA

The planned removal of subsidy on Petroleum Motor Spirit- PMS, as a way of addressing all the various fraudulent activities that has characterized the subsidy scheme since 2011, has torn economist apart. Just as the call for the removal has continued to gain momentum from Lagos Chambers of Commerce and Industry, Manufacturers Association Nigeria- MAN, and other concerned institutions, Mr. Henry Boyo, a renowned economist, in a contrary view,has charged the Federal Government to jettison the proposal to removal the subsidy. According to him, rather than removing the subsidy as it is being peddled, the subsidy should be allowed to remove itself naturally.

Boyo who spoke on the theme: Petroleum Pricing, Economic Realities and the Future of the Petroleum Downstream Sector, during the 2015 Business Clinic organized by the Petroleum Downstream Group of the Lagos Chambers of Commerce and Industry-LCCI, held at the Commerce House, IdowuTailor , Victoria Island, Lagos on Friday, asked the government to address all the economic indexes responsible for the sabotage on the common wealth of the country.

The speaker however holds a contrary position to the LCCI’s stance, that the subsidy scheme be removeabruptly by the new administration to give way for the proper and efficient function of the downstream sector to boost the economy. He said that the direct removal of the subsidy will serve as a great disincentive to the economic well being of the all Nigerians. He explained that there is a correlation between exchange rate and the pump price of petroleum product, adding that focus should be placed on how to address issues with the exchange rate.

Boyo further cautioned that the subsidy is wasteful and it should go naturally. He noted that thescheme must be removed in a manner that would be realizable.He also disclosed that the rate of corruption being highlighted as the crux of the subsidy program is a function of surplus Naira.

‘’The means of processing dollar is a cesspool of corruption which should be tackled. The situation where the CBN is allowed to trade Dollars to the Bureau de Change,as a means of mopping up excess liquidity, is a conduit for corruption. ‘Save Naira, Save Nigeria’. Once you remove the element that encourage subsidy, the oil marketers who have benefited from the subsidy scam would be cut off from the system.’’ he cautioned.

The economic analystfurther noted that the country is faced with is a thriving parallel market where the market determines the activities within the foreign exchange market.  He warned the CBN Governor, Mr. Godwin Emefele, not to submit himself to the pressure by international investors to further devalue the Naira. He projected that if the Naira is allowed to be further devalued, pump price of petrol will be sold for N400 per liters in 12 Months even after subsidy removal. He said that without subsidy the price of fuel will increase beyond what Nigerians can accommodate.

‘‘An economic process must be denominated on economic principle.  Eight per cent inflation rate means 50 percent drop in the purchasing power. The fact is that, the investors that are mounting pressure on CBN are not interested in the growth of the economy. They areonly concerned about consumer demands which cannot be superfluous when inflation is low.

‘‘Nigerians must be aware of the collateral damage subsidy removal of PMS, would do to the economy before yanking it off.The reality is that every six month, the government will have to be increase the pump price. This is because the exchange rate is a function of excess liquidity. This is responsible for high cost of funds, which is responsible for high interest rate and inflation.

‘‘It is falsehood to believe that subsidy will solve a critical aspect of the country’s problem.  To address this, Nigerians must be willing to stop CBN from making dollar available at the parallel market. It is unfortunate that almost 60 per cent of the funds available in the system have remained idle due to the actions of CBN.’’ he warned.

According to him, it is out of place to believe that Nigerians will benefit when the price of crude oil falls. The pump pricecannot go down if cost of Dollar remains high. He said,  ‘‘By the time the CBN substitute the Naira allocations issued to the three tiers of the government and the MDAs, the liquidity blot would have been so much that interest rate will beimpossible to reach. Wewould have to accommodate a situation where interest rate would revolve around 23 and 26 per cent.

‘’Since 2009 when the prices of  Diesel and Low Pour Fuel Oil (LPFO) were deregulated, the products have not been sold at cheaper rate, due to the weakness of Naira against Dollar. It is amazing that despite the licenses given to twenty corporate organizations the refineries have not seen the light of the day. This is because of the issue with the foreign exchange that is weighing down on investment in the sector.There is no way that the removal of subsidy will ensure transparency in the activities of Nigerian National Petroleum Corporation- NNPC. If the foreign exchange issue is addressed corruption in the system would go.

‘‘There is a correlation between price of fuel and exchange rate, it is inevitable that the economy will be crippled if this is left to increase without caution.’’

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He however warned that the Federal Government must not be involved in building more refineries. He disclosed that the constraints to government refineries are very evident. He said, ‘‘there are four refineries of various capacities but the functional one produces less than 25 percent of its requirement. As such, the Federal Government would need to build sixteen more refineries to get 80percent of the remaining from the four existing refineries. This action is not sustainable.

 

‘‘This isbecause government utilities are forever inefficient, in terms of service, profitability and efficiency no matter the efforts to checkmate the rate of corruption. Issues around inefficiency, constant shutdowns, turn around maintenance and heavy leakages due to political interference would always build up along the line.

 

‘‘If the private investors are allowed to build refineries which are critical to growth, we also need to be aware that security threat, high domestic cost of fund and regulated price would still be there to threaten the operations. Note that security threat in Iraq, has not stopped the Americans from cancelling their operations in those areas. High domestic cost of fund would also not be a problem, because investors would not rely on domestic funding. The major challenge would be the regulated pricing regime by the government which could force affect the profit of the investors.

 

Boyo however warned Nigerians not to be carried away by the euphoria of the plannedDangote refineries. He added that Dangote is not scared of regulated pricing because his intention is to place his refinery within the Free-trade zone. He saidthis would ensure that he continues to sell at the same price or less the freight cost of what current marketers buys from abroad as he would successfully continue to sell in dollars. Marketers are supposed to approach his refinery and buy at the same rate they buy from other foreign refineries. He noted that despite the assurance that the new refineries would make products available for domestic consumption, subsidy would still be required to sell at a cheaper rate in order to balance the 80 percent shortfall.

 

He said, ‘‘Even if refineries produce locally, Nigerians would still have to pay high for the bridging fund, marine transport, usual administrative charges associated with the product pricing template, which will be imbedded in the cost structure. After taking the component of freight, the retailers, transporters and dealers margin which may be around N9.34, the unsubsidized price of petrol would come to N114.16k. It is apparent that local production even at full capacity will still not remove the impact of subsidy removal.’’

 

‘‘But if Naira appreciate to about 50 percent, at a period where all we need is produced locally with no subsidy. At an exchanged of N100 per Dollar, the price per liter of PMS willhave fallen to N52.41k.In this case, if we take account of N9.64 for retailers, transporters and dealers. The country will get a deregulated price of N61.75k, which would be better for the government. Even at N20 as tax,PMS will sell for N87 per liter. Cost inclusive would not be more than N62, at this period subsidy would have removed itself unconsciously.

 

‘‘Even if the dollar appreciate by 100percent in this particular case to the naira (N400 to a dollar), you would find that the same landing cost and less freight of N104 of PMSwould be dispensed for N209 per liter. We however would expect that to happen when the price of crude oil went up. Even if the price of crude oil continues to fall, it is inevitable we would reach N400 to a dollar earlier than expected.

 

‘‘When the government is stampeded to removes subsidy, the implication would be a spirally inflation on almost everything in the country. Hence, continuous inflation spiral, together with the pressure on the naira would lead to further devaluation of the naira and you would get to N400 to a dollar than what is expected.

 

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‘‘Also, if the naira is devaluedmore than what it is now, (which would happen because of demand from the black market),pump price of PMSwould not be N140 per liter, the price would have gone to N160 or N170 per liter.The price of fuel is actually a function of exchange rate.Whenever there is a jump in the crude price, it correlates with exchange rate devaluation. There is nothing to suggest that higher crude oil prices led to higher fuel prices.We must be careful therefore after beating of the frustrations that would come with every increase in fuel price.

the constitution of the country does not give the CBN the autonomy to unilaterally substitute Naira allocation for Dollar derived revenue.

Meanwhile the Director General, Lagos Chamber of Commerce and Industry, Mr. Muda Yusuf, said that despite the position of Mr. Boyo, the scheme must be removed by the new administration. He maintained that it is in the overall interest of the economy and citizens for scheme to be discontinued regardless of the implications on the economy. He however revealed that thescheme in its entirety has created a distortion in the system, adding that it is the biggest hole in the finances of Federal Government.

He said, ‘‘the scheme is not sustainable, for several years, the economy suffered severe bleeding from this phenomenon. Corruption is inherent in the subsidy regime and that is why it should go.”

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