Mr. Henry Boyo, a renowned economist, gave a bird’s eye view of the economics of the fuel pump price in a monitored television magazine programme, reports Ibrahim Apekhade Yusuf
Pros and cons of oil subsidy
I think we have a fundamental misunderstanding of the cost of fuel price and also subsidy. The issue of subsidy evolves as a result of the mismanagement of the naira. In order words, the issue of subsidy is a function of exchange rate. Take for instance, if you have more tomatoes in the market at any given time, the price of tomatoes will come down and if you have less tomatoes and it’s scarce, the price will go up. It’s the same thing with money. If you have less dollars in the market comparatively with the continuously surplus naira, that’s excess liquidity. When there is so much surplus naira things would continuously be expensive. When you have a situation where you have so much naira in the market, confronting rationed supply of dollars by the Central Bank of Nigeria (CBN), you’re going to have a weaker naira. And if you have a weaker naira, ultimately, you find that the price of fuel will go up.
Correlation between weak naira and oil pump price
Indeed when you look at the correlation overtime between the price of fuel and the attendant subsidy as from 1999 or thereabouts and the exchange rate, you will find that there a very close correlation. For example, I have here an indication that by the time the naira fell from N21.89 to N84,the price of fuel jumped from N11 to N25. So you can imagine. And all the way down the line, historically, whenever the naira falls the pump price increases. So, it makes me wonder that you had stars like Okonjo-Iweala and co, in the team and the CBN was allowed to devalue the naira early this year by almost 25 per cent, the moment that happened what did you think happened to the price of fuel? It went up. So, you can understand my correlation.
A misguided labour
The labour unions themselves are misguided. I have engaged many times on this but it seems to go in here and come out here for no reasons that I know of. The reality of course is that we will have a bigger problem than you anticipate if subsidy was just simply yanked off. What would happen has been historically confirmed. Every time you have subsidy, you tend to have a situation where everybody would say ah, these people are reaping us off. But in reality, it is not so, okay? For example, everybody believes that it is the cabals that are responsible for this are the oil companies. If you owned an oil company, for example and you had to borrow money at 20 something per cent interest rate from the banks and you have to buy your forex from the banks and the banks makes profits from your forex purchase, the banks makes money on the interest from the loans you get at the same time, at the end of the day when it’s time to get your money, you can’t get it back. Your interest is running and all that. At the end of the day, by the time you’re paid after six months, you have totally whittled off all your margins and you keep saying please pay me my money and the banks hold you in the jugular. So when they say the cabal, what cabal are we talking about? The cabals are probably the banks rather than the real sector.
But the point I need to make is that if you have a situation where subsidy is yanked off, you suddenly would find that the price of fuel immediately goes up to about N140 per litre. The chances are that Nigerians would say, ah, let’s buy. After all, people are paying N200, N400 in the black market, what different does it make, at N140, it’s still ok and all that. It would save all the problems supply would be there. Let’s accept N140. Then you accept the price of N140. Then what happens? Because you have accepted the price of N140, that price infiltrates into all the other things and you have inflation. And when you have inflation, ultimately that would lead to a weaker naira. Remember as I said earlier when you have a weaker naira, the price goes up again. And when the price goes up again, then operators would say we cannot supply at this price, and of course, we would say pay them. And the price would now go up to a N170? And people would say oh, let’s accept it after all we’re suffering and all that. The price of N170 instigates another spiral and when that happens, you now have a weaker naira, which again produces a higher price. So, the vicious cycle goes on and on.
Unless you’re able to courageously say this is nonsense, if exchange rate is the issue how do we solve that. If we had exchange rate at N100 to a dollar for example, suddenly we would find even without local production, we can buy fuel about N70 per litre. Do we still have to maintain subsidy? No.