Dr. Alex Otti, renowned economist and former bank CEO, has argued that one way or the other, the federal government will have to do away with fuel subsidy, as according to him, it is not sustainable.
Dr. Otti who spoke in a interview with Business Hallmark recently, noted that it makes more sense for the government to subsidize production than subsidize consumption.
He warned that the local currency, the naira will continue to head north against the dollar if the country’s policy makers don’t hit the reset button urgently.
Asked what the country is not doing right in the wake of the recent revelation that revenue is not longer enough to service debt, Dr. Otti said, “Maybe the question should be, what are we doing right? I’m not sure we’re are doing anything right.
“We have warned in the past that with the way the economy is running, we will soon become broke, and here we are. I’m very sure that it didn’t take anybody by surprise.
“When you are exporting virtually nothing other than oil and of your quota of over 2m barrels per day, you only meet half way, it’s a problem. The last numbers show that we’re only exporting about 1.2m barrels per day.
“So, the natural thing is for the exchange rate to head north, and that is what we have seen in recent times. So, if you brought in a million dollars a month ago and the exchange rate was say, N500, but today it is about N700, you see that you have lost N200m, just within one month.
“So, we need to hit the reset button. We need to begin to think of what we can produce and export.”
Dr. Otti, who is the Labour Party governorship candidate for Abia state election in 2023, emphasized that the country needs to pay attention to production, which he said, his party’s presidential candidate, Mr. Peter Obi, has been harping on.
“My presidential candidate talked about production versus consumption, he’s been speaking about it. If you’re a consumer and you don’t produce anything, it’s only a matter of time before you hit the bottom,” he said.
According to Dr. Otti, it makes no economic sense to keep subsidy Premium Motor Spirit (PMS), otherwise called fuel.
“We also seem to be stuck with fuel subsidy. I had argued that it is better to subsidise production than consumption. When you’re subsidising PMS, you are actually subsidising consumption. We’ve spoken extensively about it.
“Subsidy has to go. As at the first quarter, we were spending 150 percent of our revenue on debt service. So, we borrow money to service debt. The country is broke.
Asked how bad the situation can get, Dr. Otti noted that it can get really bad.
“How bad can it get? It can get worse. It can actually get worse. What is important is that we need to do things that will stop it. Once supply is weak and demand doesn’t go down, the theory of economics tells you that the price will shoot up.
“It’s a demand and supply thing. And the more your currency weakens, the more your foreign investors get jittery about your economy. I’ve given an instance.
“Assuming you brought in $1 million and you change to N500 million today, but tomorrow if you have to take the money back, you have to spend N700 million to get your $1million, from that point of view, you will find out that your foreign investment, both foreign investment and foreign portfolio investment, will continue to be weak. And that is also putting pressure on supply.
“Meanwhile, you are still acting the way you are acting; as if everything is fine. There has not been any reduction in demand for foreign currency, even when the supply has reduced.
“First of all, there is need for reorientation, but more importantly, economy is about rationality. If it’s not rational, it’s not rational. You can preach, you can do whatever you want, but when the conditions are not there for production to happen, it won’t happen,” he said.
“I was joking with someone yesterday. I said, if you look around here, maybe the only thing that is made in Nigeria is probably the tooth pick. But when we looked at it, we discovered that even the toot pick was made in China.
“And what is the rationale, it is that because of the cost of production in Nigeria; and that cost will include that you are generating your own power, you are buying four wheel vehicles to go through bad roads, you are spending so much money to secure the facilities and people that work for you and so on.
“When you put all those as part of your cost of production, somebody is waiting in the wings to bring it from China, and the landing cost of a Chinese product is lower than the production cost in Nigeria. People will go to China.
“After all, all they want is tooth pick. So, it’s an integrated web. You can’t deal with one without dealing with the other, and that is why it is important that as we approach another election year, that we are careful with the choices we make.”
Asked how to manage the possible fallout of removing fuel subsidy; the inflation and other potential consequences, he said, “It’s a chicken and egg situation. So, if it’s correct, as you said, that we’re going to spend about N7trn on subsidy next year, what can that money do in this economy? It can do a whole lot. So, is it better to use it to subsidize PMS or is it better to use it to build infrastructure?
“So, it’s a choice that we have to make. Of course, when you remove subsidy, prices would go up. But it’s unfortunate that we’re talking about only petrol. How about other things? How about water? How about rice? Everything has gone up.
“So, if you’re actually stuck on fuel subsidy, then you also have to subsidize food that people eat. But the forces of demand and supply will eventually lead to an equilibrium at some point.
“So, intervention may help, but I think that the intervention is more important to support production; to support job creation… those are more important than subsidizing what people are consuming.”
Dr. Otti also shared his views on the recent threat by opposition lawmakers in the national assembly to impeach President Muhammadu Buhari over the worsening insecurity in the country.
“I don’t think I have all the details but from the little information I have picked from the media, I think the senate wants to put the president under pressure so he can act swiftly on the issue of insecurity,” Otti said.
“And I think it has gotten to such a level that absolutely nowhere is safe. If Boko Haram and bandits can launch attacks in Abuja, then nowhere can be said to be safe. So, it calls for attention. I believe that the security forces are not doing enough.
“I think that the decision of the senate to intervene is in order. It’s not just so that the president will wake up and begin to deal with the issue, it is that the presidency should wake up and do much more than they are doing presently.”
In the lead up to party primaries, Dr. Otti left the All Progressives Congress (APC) for the Labour Party. Asked what prompted his move, and why primaries of several political parties were contentious, he blamed the development on lack of internal democracy.
“The first thing is internal democracy. A lot of people who lead our political parties these days keep moving from one impunity to another,” he said.
“And any time you don’t let people express their opinions, it’s a problem. There is a saying that when you drive people from the arena where opinions are expressed, they are only going to converge at the cellars where revolutions are born. So, when people are not given the opportunity to make choices, what you end up doing is that you are building an insurrection.
“Some parties set out and decided that they are not in any mood to organize free and fair primaries. Some of them allocated positions to some favoured people. And that is why you have all sorts of anger, protests, court cases all over the place. Anywhere that the process was transparent, free and fair, I’m not too sure that people complained.
“Unfortunately, we’re in a situation where you cannot have independent candidacy. So, you can only stand for an election on the platform of a party. And once you make it difficult, or even impossible for some people to participate, then you have already thrown them out, and they would resort to protests, and some would go to the extreme of working against the party.
“So, that’s where we got it wrong.
Fundamentally, it is not being in the mood to organize democratic primaries. So, anywhere there was a democratic primary, people didn’t complain.”