A Review of the Nigerian Energy Industry

Fuel subsidy: ‘Focus on inflation, high interest, exchange rates’

30 June 2015, Lagos – The Federal Government has been urged to exercise caution in thecall for the removal of petroleum subsidy, and instead focus onaddressing all the economic bottlenecks sabotagingNigeria’s common wealth. An economist,Mr. Henry Boyo, argued that the direct removal of subsidy will serve as a great disincentive to the economic wellbeing of all Nigerians. –

IPMAN-fuel pumpHe spoke on the theme: Petroleum Pricing, Economic Realities and the Future of the Petroleum Downstream Sector,at the 2015 Business Clinic organised by the Petroleum Downstream Group of the Lagos Chambers of Commerce and Industry, LCCI.

However, Boyo’s views contradicted sharply with the LCCI’s, which insisted on the abrupt removal of the subsidy scheme to give way for the proper and efficient function of the downstream sector to boost the economy.

Boyoargued that there is a correlation between exchange rate and the pump price of petroleum product, adding that subsidy should be removed in a manner that is realisable. He also said the rate of corruption being highlighted as the crux of the subsidy programme is a function of surplus Naira.

“The means of processing dollar is a cesspool of corruption which should be tackled …‘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. He warned the CBN Governor, Mr. Godwin Emefele, not to submit himself to the pressure by international investors to further devalue the Naira.

According to him, if the Naira is allowed to be further devalued, pump price of petrol will be sold for N400 per liter 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 are only 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.” he said. According to him, it is out of place to believe that Nigerians will benefit when the price of crude oil falls, asthe pump price cannot go down if the cost of Dollar remains high.

“By the time the CBN substitutes 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 be impossible to reach. We would 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 rates, due to the weakness of Naira against Dollar.

“It is amazing that despite the licenses given to 20 corporate organisations, private 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.”

– Vanguard

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