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Subsidy removal’ll reduce pressure on Naira — FDC


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Analysts at the Financial Derivatives Company Limited have expressed support for the removal of fuel subsidy saying it would reduce the pressure of the exchange rate of the naira and lead to long term appreciation of the national currency. “More importantly, because there is an inflated import bill due to the subsidy scam, subsidy removal will reduce the pressure on the currency and the naira will appreciate in the medium term”, they said in the FDC Economic Bulletin issued last week.

They noted that removal of fuel subsidy will produce short term gain but long term gain. “Subsidies are reverse taxes and if removed will reduce the disposable income of consumers in the short term. However, it will result in an efficient redistribution in income, spur a rehabilitation of the refineries and an efficient oil industry in the long run; short term pain but long term gain”, they said.

Titled, “Petroleum Subsidy Scam: The Raping of Nigeria”, the bulletin stated, “The benefits associated with a subsidy removal are usually long term which will be solely determined by how the appropriated subsidy funds will be utilized to support optimal productivity within the economy.

“If the subsidy were removed today, the pump price would jump to approximately N130, which is the total open market price when one considers both the landing cost of petrol at N115.77 and the margin for transporters and exporters of N15.49 as of May 10, 2015.1 However, the pump price would be guided solely by global oil prices and would not be at the mercy of oil marketers.

Cur rently, scarcity initiated by the oil marketers due to delayed pay- ments increased the pump price of petrol. The scarcity created an avenue for arbitrage, with the fuel being sold for as high as N600/ liter in the black market. The impact of the strike and fuel scarcity was severe, and almost crippled economic activities, as banks and even telecom operators had to reduce their operating hours due to the scarcity of petroleum products.

This situation could be averted if the issue of subsidy is addressed and put to rest. But addressing fuel subsidy is just one part of the hydra-legged problem in the oil and gas sector. The passage of the PIB and a deregulation of the sector are required to fully enjoy an efficient oil and gas industry. In the long run, subsidy removal will assist the government financially and create a path to addressing the problems in the oil sector.”

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