Special Adviser to President Buhari on National Planning Ben Akabueze has weighed in on the increase in fuel price recently announced by Nigeria’s Minister for State for Petroleum Dr. Ibe Kachikwu.
He wrote an interesting piece on his facebook pagewhere he explained the price removal from his own perspective. Here it is in full.
I have finally decided, at the risk of being labeled / abused, to weigh in on the discussion regarding the new framework for pricing petroleum products in the country.
My sole purpose in making this post is to attempt to clarify the issues, especially for those whose minds are not already closed on the subject.
Most commentators have used ‘subsidy removal’ to describe the FGN’s decision. However, if you read the statement issued by the HMS-Petroleum you will not find subsidy removal therein. The fact is that at the beginning of this year, the FGN announced that henceforth petroleum product pricing will be based on a ‘Price Modulation template’. That is why there was no fresh provision for Fuel Subsidy in the 2016 budget.
The two key variables in this template are Crude Oil price and N/$ exchange rate. Earlier in the year, based on crude price of $38pbl and N197/$, the template produced a price of N86-N86.50/litre of PMS. It is this same template that has now produced a price of N135-145/litre.
So what changed?
Firstly, crude price increased from $38 to $46. Secondly, an autonomous market exchange rate of N285/$ was applied. The first reason is obvious but the second requires explanation.
It is no longer news that there has been a more than 60% crash in the price of crude oil, which accounts for over 90% of Nigeria’s foreign exchange(fx) earnings. We are therefore facing severe fx shortages, worsened by our failure to save during the boom years of Jonathan’s administration.
For the records, with lower average crude oil price during Obasanjo’s administration, Nigeria built up reserves/savings of over $60bn. Under Jonathan we ended up with about $30bn despite higher average crude oil price.
The CBN therefore resorted to rationing the limited fx. In government’s determination to keep the price of PMS low, about 40% of available fx was being allocated to fuel importation. This meant that manufacturers were crowded out of the CBN fx window.
As a consequence, many factories have closed down and laid off their staff. Others have resorted to sourcing fx autonomously at higher rates, which they pass on by price increases for their products, thus fueling inflation.
The decision government has therefore made is to prioritise fx allocation to the real sector thereby saving jobs and reducing prices of some basic goods. Note that the biggest fuel cost for manufacturers is diesel (since deregulated) for their generators. In other words, instead of having manufacturers source their Dollars at about N285/$, let the fuel importers do so especially since most of the PMS sold in the country was above N86.50 despite allocating 40% of our fx to fuel imports.
This is the difficult trade-off government has had to make. Without a doubt, the fuel price increase will cause hardship for many but hopefully some of that will be ameliorated by the effect of manufacturers getting more fx, with their staff getting back their jobs and lower product prices.
Now, let me talk about subsidy removal. The fuel subsidy regime in Nigeria has never made sense to me for the following reasons:
(1) It was a subsidy on consumption. Wise nations subsidise production rather than consumption. In such countries, fuel efficiency is often the most important consideration in buying a car. But in Nigeria, because of cheap fuel, a guy would rather buy a 10 year-old fuel-guzzling ‘tokunbo’ SUV than a brand new KIA Soul for same price!
(2) The subsidy scheme was extremely fraud-prone. Trying to reform it was like attempting to reform Satan – an impossibility. It was therefore best to scrap it. That is why I supported the Jonathan govt’s effort to do so in 2012. Probably some people opposed Jonathan’s subsidy removal for political reasons. However, the unprecedented subsidy scam of 2011, when we spent over N2trillion (about 50% of the national budget) on fuel subsidy made some people so mad with the govt that they were in no mood to reason with it.