Yemisi Izuora
The Financial Derivatives Company Limited (FDC) has asked government to consider removal of fuel subsidy as a way to stabilize the Naira.
The company believed that such step would further reduce pressure of the exchange rate of the local currency and lead to long term appreciation of the national currency.
It observed that already there is an inflated import bill due to scam associated with the subsidy regime and stated that the subsidy removal will reduce the pressure on the currency and the naira will appreciate in the medium term.
Experts at the company noted that removal of fuel subsidy will produce short term gain but long term gain pointing that subsidies are reverse taxes and if removed will reduce the disposable income of consumers in the short term but will certainly 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.
In its recent bulletin titled, “Petroleum Subsidy Scam: The Raping of Nigeria”, the FDC stated that “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.
Currently, scarcity initiated by the oil marketers due to delayed payments 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.”