Let us celebrate a correct call. Yes, when Nigeria announced that it had removed fuel subsidy, I wrote thus: “According to AO Lawal’s Economics textbook, companies consider the availability of factors of production before they would locate their operations. In that secondary school textbook, there was a section he called “Location and Localization of Industries”. In Nigeria today, ENERGY is one of the key components of production, and without energy, you have no economy. In Germany, industrial output is fading because cheap energy from Russia has gone. But Germany will be back – they will find a way to subsidize energy for their industries.
“Nigeria, by removing fuel subsidy, instead of fixing the corruption which makes production-oriented fuel subsidy ineffective, will trigger an avalanche of degraded production output that will decimate the economy. It is not a smart policy to think markets will pay the full cost of energy when EVERY productive nation in the world subsidies energy, including US, Japan, China and everyone!
“Our problem is not fuel subsidy; our problem is the corruption in fuel subsidy which makes fuel subsidy look bad. Yes, open borders, fake invoicing, etc are not due to fuel subsidies; those are weaknesses in governance. Fix them and give manufacturers in Nigeria the opportunities to compete…”
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Today, it is now official: “The National President of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), Festus Osifo, on Friday, said the Nigerian government has restored subsidy on petrol, despite the official government policy of breaking with the subsidy regime since May.” When the global oil price went up along with the exchange rate of Naira to US dollars, even as the price of petrol remained constant, we knew that someone was paying the variance. Today, it is clear: fuel subsidy is back! It never had a chance because the original policy made no sense.
Speaking on Friday, Mr Osifo said due to the cost of crude oil in the international market and the exchange rate, the government still pays subsidies on petrol.
“The speculation has been there looking at the fundamentals because two basic things that contribute to the pricing today are the exchange rate and the price of the crude in the international market.
“You know, in the last few weeks, the price of crude has been going up, and inches towards $95 per barrel. Based on this, there are speculations that there may be an increase in the price of Premium Motor Spirit (PMS) but behind the scenes, we have been engaging the government and trying to make them understand that there is no basis for that.
“Because for us, you know when they floated the exchange rate, you would recall that the exchange rate was moving at a very fast speed before some interventions came,” Mr Osifo said.
He also said: “Today the official exchange rate is around N770 per dollar. So what we have told them is that all international agencies, if you look at JP Morgan, Bank of America and all, they have said that our naira today is undervalued. What that means is that our naira should be exchanged somewhere around N600 to N630 to a dollar.
“And if the government is able to push it down to that range then we would be buying PMS at a little reduced rate compared to where it is today.
“So, we have told the government that there is no basis for us to be buying PMS at a price higher than what we have today. But instead, it should go down. But the controlling factor is the exchange rate and so if they could work on the exchange rate. Today it is somewhere around N770 to a dollar. But if the true value comes to bear around N600 to a dollar then we would even buy PMS at a cheaper rate,” he added.
Responding to the question of whether the government is still subsidising petrol since the removal of fuel subsidy, Mr Osifo said, “We have to be honest to Nigeria. As at today, I could tell you that if you look at the crude oil price, there is what they call Platt so if you google it you will see the Platt index and if you check the Platt index, that will give you the X depot price from Rotterdam.
“So, if you look at it and you convert it using our current exchange rate you know that the landing cost in Nigeria today ought to be more than what we are dispensing at the pump,” he said.
He said what that means is the additional cost is being catered for by the government.
“But our cry is this, we should manage our FX more effectively compared to the way we are managing it today. If the true value of our exchange FX is around N600 to a dollar, if that is the true value, the government should find a way to manage it there is no need for paying subsidy.
“The reason we are paying subsidy today is because our exchange rate has run away and if we continuously allow it to run, it will be a nightmare for everyone.”
He added: “They (the government) are paying subsidy today. You could see what happened in the last few months when the subsidy was removed. You could see the challenges that an average Nigerian has passed through. So, it has been very difficult but the government had the tools with which they could use in managing the exchange rate more effectively so that the subsidy will disappear but they are not using it.”
Comment on Feed
Comment 1: Is PENGASSAN President now the GMD of the NNPCL, the Minister of Petroleum Resources, the Minister of Finance or the President of Nigeria?
If the subsidy has been restored why are the NLC and TUC, of which Osifo is a prominent member, still demanding palliatives from the Nigerian Government?
My Response: His point is that fuel has moved from sub-N200/litre to now N600/litre and should be N800/litre now if not for the subsidy between N600 to N800. He does not have to be GMD of NNPC to say that. Also, NLC and TUC have a point: account for the loss of value between N200 and N600 since N600 seems to be the new stable state. They want to be compensated for that variation.
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The subsidy is back at a new pump price of N600 and above, the question is, has the corruption gone? Excitement does nothing in matters of pure economic logic. Will a pump price subsidized at N600 or N700 make our manufacturing sector competitive? Will that make logistics cost which determines commercial viability competitive?
The truth is that building a working economy is hard, and it is even harder when you have people who cannot do it at the helm. Like I have stated a handful of times here, economics does not bend to politics, rather it’s the other way round; if you don’t know this basic reality, you will continue to falter.
How exactly do we measure progress? It’s getting fuzzy by the day, so much noise, but nothing shows that things are about to get better.
If you damage five things and restore two, have you really made progress? Remember that five things were good, and you damaged them all, and then announced that you have fixed two, have you improved? It’s after fixing the five damaged, and then account for the lost time, and then build extra two or three, that is what progress looks like. When we are ready for productive conversations, then we will start thinking like higher animals.
It’s foolishness to think you can fight corruption in Nigeria let subsidy go adjust the minimum to the to inflation and hit imported goods with tariffs that’s gonna make producing in Nigeria alot cheaper than importing the money gain from remover of subsidy should be give to the banks and they should give these money in terms of loans to Nigerians at a single digit rate a year with 70 percent of the money targeted towards SME
They will sill embezzle it.
Nonsense country