Scarcity trails subsidy removal as Tinubu begins ‘housecleaning’
30 May 2023 |
4:35 am
President Bola Ahmed Tinubu, yesterday, kick-started the long, tortuous journey towards pulling the economy from the woods, declaring that the days of fuel subsidy are gone and hinting at the need for a “thorough house cleaning” in the monetary policy.
• Stakeholders call for more consultation, phased subsidy removal
• You can’t remove fuel subsidy through mere announcement, says professor of energy economics
• ‘Tinubu must increase revenue generation to achieve stable exchange rate’
• NLC, TUC, NECA: New President must engage labour before removing subsidy
• HURIWA calls for mass protest, warns against unilateral decision
• Unified exchange will increase investment, capital inflow
President Bola Ahmed Tinubu, yesterday, kick-started the long, tortuous journey towards pulling the economy from the woods, declaring that the days of fuel subsidy are gone and hinting at the need for a “thorough house cleaning” in the monetary policy.
Tinubu had bared his mind on the two areas previously as a candidate and his views were unambiguous. He merely re-echoed his long-held views on the subject yesterday in his inaugural speech as the 16th president of Nigeria.
In Lagos, the subsidy removal message struck a chord with marketers as most filling stations stopped dispensing. As of press time, there was no serious panic buying but The Guardian observed a gradual reduction in the number of fuel stations that opened for business. In Abuja, long queues resurfaced as some marketers shut down their operations.
With no cabinet to explain the subsidy removal pathway, there are concerns that without context to subsidy removal, chaos would thrive as marketers hoard products. Just a few hours before the inaugural speech of the president, motorists could go to fuel stations and fill their tanks but the reverse was the reality, a few hours after the speech that hinted at subsidy removal.
Stakeholders have backed the plan by Tinubu to remove subsidies and double the electricity supply in the country but warned that the removal of subsidies could backfire if done without proper consultation and planning.
The stakeholders called for rigorous stakeholder engagement, stressing that unless a gradual and phased approach and critical pricing planning are done, the country may be thrown into crisis.
In the last eight years under the former president, Muhammadu Buhari, about N17.5 trillion was spent on fuel subsidies while N10.5 trillion out of the total spending happened in the last 18 months of the administration.
Energy expert and former legal lead at Shell, Ameh Madaki, said the sudden announcement by Tinubu would create a chain reaction and lead to suffering of millions of Nigerians in the short to medium-term.
According to him, marketers would profiteer immediately by hoarding products to maximize their margins and the next few days would be grueling indeed.
“Having been sustained for this long, a phased approach to it which takes cognizance of all its ramifications would have been a better option in order not to disrupt an already impoverished citizenry and a fragile economy.
“Subsidy in itself is not a bad thing and governments all over the world subsidize critical sectors of its economy. It is the manner of applying the subsidies that could create distortions and shortchange the economy, which is what has been done all this while. It is still possible to stop paying subsidies on petroleum products without increasing the pump prices if done properly,” Madaki said.
A professor of energy economics at the University of Ibadan and Director of the Centre for Petroleum, Energy Economics and Law (CPEEL), Adeola Adenikinju, said the move shows Tinubu’s readiness to tackle Nigeria’s economic challenges.
He noted that electricity supply would improve drastically if both national and subnational governments are allowed to generate, transmit and distribute electricity across their domain using resources available in their areas – hydro, coal, gas, oil, solar, winds and wastes.
Adenikinju, who is also a member of the Monetary Policy Committee (MPC), said the President’s promise to provide a conducive environment for local and foreign investors to play would also help to drive investment in the electricity sector, adding that an improved macroeconomic environment like low inflation, low-interest rates, harmonised exchange rate, ability to repatriate dividends and profits, if implemented, would change the investment climate in Nigeria.
“Fuel subsidy has to go,” Adenikinju said, noting that subsidy has deprived the economy and the petroleum sector of huge investments, jobs and revenues.
“Our neighbors have higher fuel prices and lower inflation and poverty rates. Across Nigeria, fuel prices are much higher than the official prices. Yet, there is no data to show that inflation rates are higher in those areas. Government needs to support mass transport systems and implement effective cash transfers to vulnerable households to mitigate the initial pain of fuel price adjustment. In the long term, the Nigerian economy would be better for it,” he said.
The professor urged labour unions to support what is best for the economy, stressing that the poor are already paying the market price for kerosene, and the transport and manufacturing sectors, also pay the market price for diesel.
But a professor emeritus in Petroleum Economics and Policy Research at Louisiana State University, Centre for Energy Studies, Wunmi Iledare, said subsidy removal could not be done through a mere announcement.
“This is only doable with a transformational leadership mindset with strategic thinking. The president must make professional appointments apolitical in the energy sector to succeed. Appointments based on rewards will not fix the aching problems in the energy sector,” Iledare said.
The Central Bank of Nigeria (CBN), three years ago, pledged to work towards achieving and harmonising the extremely-divergent foreign exchange rate. But it remained at the level of promise with investors citing the rigidity of the market and wide arbitrage as major disincentives.
In his speech, Tinubu charged: “The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy.
“Interest rates need to be reduced to increase investment and consumer purchasing in ways that sustain the economy at a higher level.
“Whatever merits it had in concept, the currency swap was too harshly applied by the CBN given the number of unbanked Nigerians. The policy shall be reviewed. In the meantime, my administration will treat both currencies as legal tender.”
An economist, Prof Ken Ife, lauded the President for demonstrating the courage to embark on some “housecleaning” to achieve price stability, noting: “Obviously, he dropped the hint on arbitrage. Arbitrage is a part of the things that will come under the category of cleaning up because it means that some people may be profiteering from the present system.
“He has an agenda. But my only advice is that the problems of the monetary policy are about inflation, high exchange rate, interest rates and high monetary policy rates in the economy. These things are about rates and prices.
“The demand and supply sides have to be looked at carefully. About 70 per cent of the foreign exchange of Nigeria comes from NNPC Limited while 10 per cent comes from gas. Another 10 per cent is split between foreign direct Investments and portfolio investments which have been dwindling.”
Ife, who is a member of the governing council of the Ministry of Finance Incorporated (MOFI), said the mounting debts, and oil theft that is responsible for Nigeria’s inability to meet its OPEC, hence the dwindling revenues are very formidable challenges.
The Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel also lauded the President’s foresightedness, saying collapsing all the forex intermediation windows at the Central Bank by allowing the banks to determine rates through a float would bring back foreign direct investors, export proceeds without rebates and higher diaspora remittances.
“A single exchange rate will enable market makers in the Nigeria Autonomous Foreign Exchange Fixings (NAFEX) to find a forward curve required to structure medium- and long-term contracts to hedge currency risk for long-term non-speculative foreign direct investments,” he explained.
He was, however, quick to add the idea that the CBN could cap MPR as a tool to slow down prime lending rates, and impact lower commercial lending rates, is likely to be a farce, saying: “This is because the real driver of inflation, and the reason inflation is unresponsive to MPR hikes as the real problem to solve is the distortion in the FX markets.”
On his part, the Chief Executive of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, welcomed the President’s roadmap. According to him, “achieving a unified exchange rate is not tantamount to a devaluation proposition, but a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market which allows for rate adjustments as and when necessary”.
Yusuf maintained that it is a policy regime that would reduce uncertainty and inspire the confidence of investors and minimize discretion and arbitrage in the foreign exchange allocation mechanism.
“A unified exchange rate regime will enhance liquidity in the foreign exchange market. It reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors and it is more transparent as a mechanism for forex allocation.
It also minimises discretion in the allocation of forex and reduces corruption vulnerabilities and reduces opportunities for round-tripping and other sharp practices,” he said.
On subsidy removal, the CPPE Chief Executive said the move would free about N7 trillion into the federation account, saying this would reduce the fiscal deficit and ultimately ease the burden of mounting debt.
“This will positively affect the investment space. Currently, it is extremely difficult to attract private investment into our petroleum downstream sector because of the unsustainable subsidy regime and the stifling regulatory environment. The subsidy removal will eliminate the distortions and stimulate investment,” he said.
Lead Director, the Centre for Social Justice (CSJ), Eze Onyekpere, said there are two key promises made by the President, which he considers very significant.
“The first thing I saw in the speech is the issue of the fuel subsidy which he said is gone. The second one is the unification of the exchange rate, which is going to be good for the economy in terms of liberalising the exchange rate regime and introducing liquidity into the foreign exchange market,” he noted.
But the organised labour has pushed back, saying making the nation’s refineries work before subsidy removal stands.This is just as the Nigeria Employers’ Consultative Association (NECA) also urged Tinubu to ensure that, at least, two refineries start producing in his first 100 days in office.
The Nigeria Labour Congress (NLC) and the Trade Union Congress (TUC), in their reactions, said until he engages the labour movement, their position on subsidy remained unchanged.
The National Deputy President of the TUC, Dr. Tommy Okon, said: “It is a statement he made. Until he engages us we will know what to say. He cannot unilaterally remove subsidy without engaging with stakeholders, including labour.
“Labour is a partner in progress, he must involve us and consider our decision. Our position on subsidy removal has not changed. We expect a lot of reforms and incentives and not one-sided.” On the promise to create one million jobs through the digital economy, Okon said the youths are already thriving and making waves in the digital sector. He said what is needed from the government is to create a conducive environment for the informal economy to thrive.
“Let the bill come up first. We are not against any policy that will create a job but not convince people who may not have a deep understanding of what the digital economy is. One million jobs will be created, how?
“The civil service has not recruited for many years now, why doesn’t he say he wants to create some number of jobs in the public sector to energise the sector and create a conducive environment for the informal economy to thrive and boom, where a lot of people will have the opportunity to engage themselves, that will reduce crime and criminality,” he said while speaking on the proposed Omnibus Jobs and Prosperity Bill.
A civil rights advocacy Group, Human Rights Writers Association of Nigeria (HURIWA), yesterday, also kicked against what it called the dictatorial, authoritarian and unconstitutional announcement by the new President.
The group in a statement by its national coordinator, Emmanuel Onwubiko, described the decision as inconsiderate, insensitive, irrational and reckless.
Consequently, HURIWA asked the organised civil rights community and the Labour unions to mobilise Nigerian workers and all proletarian people of Nigeria to embark on indefinite strike and civil disobedience actions should President Bola Ahmed Tinubu not reverse his decision to end the subsidy regime when inflation and poverty are tearing millions of Nigerians apart and sending many to their early graves due to intractable economic adversities.
The Rights group recalled that Justice Riman, had in the suit marked FHC/AWK/CS/58/2023, made an order restraining Usman Alkali from further parading himself as the Inspector General of Police of the Federal Republic of Nigeria or exercising any form of command or control over the Nigeria Police Force.
The court also granted an order mandating the President of the Federal Republic of Nigeria to immediately convene a meeting for members of the Nigeria Police Council to appoint a new Inspector-General of Police capable of holding the office for the fixed term of four years unhindered by Section 18 (8) of the Nigeria Police Act, 2020 and also in line with the provision of Section 7 of the Nigeria Police Act.
The removal order followed a suit filed by one Okechukwu Nwafor against the President of the Federal Republic of Nigeria; Usman Baba Alkali; Attorney General of the Federation and Minister of Justice; and Nigeria Police Council, 1st to 4th defendants respectively.
But the Director General of the Development Agenda for Western Nigeria (DAWN), Seye Oyeleye, urged the leadership of NLC and TUC to jettison the idea of rushing to the streets to protest but rather sit and dialogue with the new administration on a possible palliative that would cushion the temporary pains the removal will generate.
The DAWN Commission helmsman said the bitter truth about why the subsidy must go is that Nigeria could not continue to subsidize fuel subsidy with up to $9.6 billion yearly.
“Tinubu has acted boldly, NLC and TUC should allow reason to prevail instead of rushing to protest,” he charged. Chief Executive Officer of Wyoming Capital and Partners, Tajudeen Olayinka, has described the speech as an indication that Nigeria’s economy will move away from the hitherto public sector orientation to more private sector-led growth.
According to him, fuel subsidy removal and immediate unification of the exchange rate are key decisions that would put the economy on the path of sustainable growth. He noted that the financial market would react strongly, concerning moderation in interest rates and lower cost of capital.
However, he noted that the decision requires orderly functioning of the commodities, financial and foreign exchange market.
“The Capital Market will experience a boom, as more investors and public companies approach the market to take advantage of a new era. We hope to see improvement in capital inflow and more private-sector involvement in economic activities. It is important we wait for further announcements, though,” he said.
Also speaking, Vice President of Highcap Securities, David Adonri, said the President addressed three pain points –an insecurity that has crippled the rural economy, discontinuation of fuel subsidy and unification of the exchange rate.
He maintained that his remedial plans to tackle these challenges can boost the economy and attract investments.
However, he said, the President failed to address the crippling debt burden, which has fueled inflation and a rise in interest rates. He added that his GDP growth target of six per cent could be a mirage if he focuses on secondary infrastructure development at the expense of primary infrastructure as in the case of the previous administration.
“If he continues with President Buhari’s excessive borrowing spree, increase in GDP will just remain an inflationary growth or motion without movement,” he said.
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