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Why Fuel Prices Will Always Rise & Make Subsidy Inevitable

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The government of President Goodluck Jonathan insists that the current price of N97/litre accommodates a subsidy of about N55/litre.   Some critics have however, maintained that there is, in fact, no subsidy; others demand that even if it exists, it

should be seen as the social benefit of having crude oil in our back yard.   What is clear, however, is that irrespective of one's position, federal government annual budgets have always provided for subsidy; nonetheless, the huge difference between a subsidy budget of less than N300bn in 2011 and indicated actual payment in excess of N2 trillion has become a source of consternation to most Nigerians.   The huge discrepancies between the volume of fuel consumed and subsidies payable from the records of various government agencies, including CBN, NNPC,PPPRA, etc, have not helped matters either; the 'babel' of statistics from these parastatals spoke volumes on the arbitrariness and insensitivity of governance of Nigeria.

The revised subsidy provision of about N700bn in 2012 budget may in fact be inadequate if the sum of over N2 trillion controversially paid out in 2011 is more accurate.

Indeed, the Governor of Central Bank, Lamido Sanusi and the joint Coordinating Minister of the economy and Minister for finance, Dr. Okonjo Iweala, have both been reported to express their fear that the 2012 budget provision for subsidy would quickly run out before the end of the year!

Indeed, there will be a shortfall in revenue expectation, if international crude oil price falls below the benchmark of $75/barrel and output projection of 2.5m barrels/day is not significantly exceeded.

Fortunately, however, crude prices have hovered around $110/barrel for most of Q1 for 2012 and output has remained fairly stable around the budget benchmark; if this trend continues, there will be no need for the government to lose sleep on our capacity to fund increasing subsidy values without the dismal prospect of further increasing our debt burden beyond the current level of about N5 trillion with over N500bn set aside as service charge in this year's budget.

Paradoxically, however, the social welfare of most Nigerians may not see any improvement as the additional export revenue realized from crude prices in excess of the budget benchmark would have been channelled to fund increasing subsidy instigated by the same 'favourable' crude market.

The reason for such anomaly is quite simple; higher crude prices with outputs in excess of budgets benchmark will create a fortuitous windfall in export revenue; but the higher crude prices, which stimulated the increased revenue, will also translate to higher fuel prices domestically, as crude oil prices and exchange rate fluctuations are the major determinants of domestic fuel prices.   Meanwhile, the social and economic instability engendered by the January 2012 fuel strike is probably a red flag that Nigerians will not tolerate another price hike beyond the current N97/litre any time soon.

In this event, the lion's share of increased revenue from higher crude prices will inevitably be absorbed in funding subsidy, with minimal leftover for other social welfare or infrastructural applications.   Thus, if unexpectedly, crude prices rise above $200/barrel and domestic fuel price remains stuck below N100/litre, then we may discover to our utmost horror that we may have to borrow in spite of stupendous export dollar inflow to fund subsidy.

On the other hand, a fall in the output of crude with oil prices also much below the budget benchmarks would not give us respite either, as lower crude oil prices and output would similarly reduce revenue from oil exports.   In the event that crude oil receipts account for over 80% of the total government revenue, the impact of a major fall in crude prices and output could have a disastrous impact on our economy.   In fact, government will find it expedient to formally devalue the naira, well below the current rate of N160/$1 if monthly allocations to the three tiers of government are to remain stable in nominal terms.   Regrettably, however, naira devaluation would inevitably trigger rising domestic fuel prices and inflation and thereby reduce purchasing power of all income earners.  

In such event, our economy will become trapped between the horns of a dilemma, as increasing crude oil prices will produce higher domestic fuel prices, while on the other hand, reducing crude oil prices will lead to devaluation, and inevitable, higher fuel prices still.   So either way, we lose as a nation, as in both of the above scenarios, the resultant product is higher domestic fuel prices and steeply rising inflation!

It would be impossible for government to cancel subsidy; i.e. dismantle NNPC's import monopoly without first dismantling the monopoly of the Central bank in the foreign exchange market, where CBN supplies over 80% of all the dollars in the market, while it concurrently maintains its constitutional monopoly of naira issues.   However, the seemingly intractable dilemma of crude oil fluctuation and rising domestic fuel prices will become effortlessly resolved once the CBN directly transfers export dollar revenue to the rightful constitutional beneficiaries without substituting naira allocations at rates of exchange, which are unilaterally determined by the apex bank.

If crude oil dollar receipts are paid to the three tiers of government with dollar certificates rather than bloated naira sums, the resultant impact will be as follows: if production remains constant or in fact, increases, Nigeria would be the beneficiary of increasing dollar revenue.   For example, if crude oil prices rise to $150/barrel from say $100/barrel, with stable output, our crude exports dollar revenue will rise by at least 50%; this would pitch the increasing dollar receipts against the unchanged naira value in the market and thus strengthen the naira.   A stronger naira would mean cheaper domestic fuel prices, so long as international fuel prices remain denominated in dollars.   In this event, there will, in fact, be no subsidy whatsoever in domestic fuel prices; indeed, there will be ample opportunity to impose a sales tax of about 10% and above on the domestic price of fuel.   In this event, government will not only save over a trillion naira from non-payment of subsidy but may also be the beneficiary of additional petrol tax revenue of another N1 trillion as the nominal domestic price of fuel continues to fall with a stronger naira.

This approach will benignly resolve the dilemma of fuel subsidy abolition once and for all.

By Henry Olujimi Boyo