THE current administration has taken two key decisions on the economy of this country. The first one was the removal of subsidy on petrol, and the second one is the merging of official rate and the parallel market rate. The parallel market is usually referred to as the black market. These two decisions had adversely affected the economy of this country. According to Oxford Advanced Dictionary, subsidy means money that is paid by a government or an organization to reduce the cost of services or of producing goods so that their prices can be kept low. In simple economic terms, subsidy is the difference between the cost of Petroleum Product and the selling price. According to Petroleum Product Pricing Regulatory Agency, the landing cost of litre, and other necessary costs determine the cost of a litre to the organization. In simple terms, subsidy arises when the selling price to the public is less that the landing cost; the difference constitute the subsidy paid by the government.
What one needs to emphasis is that subsidy is not a bad thing, but it is economically reasonable to subsidy production instead of consumption. In developed economies, subsidies have continued to be applied to certain sectors of the economy such as transport and energy. As one author argues, subsidy is not a strange bird in market economies and should not be served cold to less developed countries. In Nigeria subsidy on petrol has been bastardised. It becomes the haven of corruption. We were not only subsidizing our domestic consumption, we were also subsidizing, some West Africa countries. In 2010 Federal Government Budget, a sum of N240 Billion was to be spent on subsidy, but by October the same year, over One Trillion Naira had been spent on subsidy and by the end of the year, Federal Government would have spent about N1.3 Trillion Naira. With this colossal amount of money, the economy was heading for the worse. This amount of N1.3 Trillion could have been used to improve the debilitating infrastructure in the country.
The corruption was too much, that it was alleged that when an entrepreneur imports 60 metric tons, he would rush to Abuja, to claim subsidy on 100 metric tons. The activities of (PEF) Price Equalisation Fund worsened the situation. It does not follow any economic principle that petroleum products should be sold at the same price throughout the country. Right from the time of President Obasanjo our leaders realised that subsidy on a petrol was a waste of our hard-earned money. In one of his speeches President Obasanjo said: “Subsidising fuel to the tube of N12 per litre is a wasteful way of spending our money, noting that the N250 Billion subsidy per annum could be saved and used in providing education, health, water supply, roads, security and food”, His successors also knew that subsidy was a waste but none of them had the political will to remove it. This explains why we should praise the current administration for showing the political will, for removing the subsidy. However the pain on the people is too much, therefore government should embark on providing palliatives that would cushion the negative effect of subsidy removal. Unfortunately, right from the time of President Obasanjo, no one has been successful in repairing our dilapidated refineries or build new ones. Nigeria, being the 6th largest producer of crude oil in the world, cannot refine enough petroleum products for domestic consumption. This is collective failure of leadership of our previous leaders.
Unification of our foreign exchange is the second important decision made by this administration. Before the merger the official rate of exchange of naira to the dollar was about N400, while it was about N800/900 naira to the pound sterling. In order to achieve the merger, government has embarked on floating the naira. It is worthwhile to expatiate briefly on the floating exchange rate. The basis of floating exchange rate is that the exchange rate between two currencies is determined by market forces of supply and demand. In this way, the available currency goes to those who are prepared to pay the prevailing price for it and those who cannot afford it may not be able to import goods from abroad. The main question is: How beneficial is this system to our economy. Freely floating exchange rates are not desirable in our economy that depends heavily on imports of all sort of materials. Floating or fluctuating exchange rates are so unpredictable and are subject to wide and uncontrollable fluctuations, and susceptible to foreign and domestic currency speculation.
One can argue that floating the naira will subject Nigeria to a greater instability and vulnerability because our development plans and other economic activities will depend on the free market forces of supply and demand for both local and foreign currencies. With the present situation, the naira has been greatly devalued. Initially, the official rate of exchange was around N400 per dollar, but within few months, under the floating exchange rate system the exchange rate had jumped to between N700/N800 to the dollar. This has created inflation, with a resultant increase in the prices of most goods both imported and locally produced. With the system of allowing the naira to find its realistic value, the prices of everything, particularly petroleum products have gone beyond the reach of almost every Nigerian except the special class. We are witnessing what is referred to as a galloping inflation, defined as the persistence rapid rise in prices of goods and service. One can identify a number of reasons for this. a. There is a high demand for both imported consumer goods and raw materials. High prices of imported goods arising from implementation of floating exchange rate will not debar Nigerian from importing foreign goods including petroleum products which we do not produce domestically.
- At the present rate of our technology, whether we like it or not, we have to import capital goods and some raw materials which are produced abroad. Our factories are equipped with foreign machinery and equipment. Besides importing the main machinery, we have to import spare parts as well. Higher prices as a result of the depreciation of naira, will increase cost of production. There is hardly anything we use in our homes that does not contain foreign components. Attempt to float the naira, to achieve its realistic value will continue to create economic hardship for the people. As the value of naira continues to fall, there is the likelihood that price of petrol will increase because we do not refine at home. Importers are forced to import foreign goods with devalued naira. An importer needs more naira to buy the same quantity of foreign goods purchased two or three months ago. The situation described above suggests that we should have a rethink of floating the naira. It is economically unreasonable to revert back to where both the official rate and parallel rate operated.
When the official rate was N400 to the dollar, the black market was around N750 to the dollar, this gives room for arbitrage which adversely affect the economy. The question is, how does the country get out of this problem? One is forced to suggest a managed currency, if we want to generate growth and development. We cannot allow our currency to continuously depreciate, we have to manage our currency, no country leaves his currency totally to the whims and caprices of the market forces. Under a managed currency or fixed exchange rate system, a country fixes the rate of exchange of her currency within two narrow limits against foreign major currencies, such as dollar or pound sterling, which are universally accepted as a medium of exchange throughout the world. The rate of exchange is not fixed per se, it is allowed to fluctuate within lower and upper limits. For example, the lower limit may be N600 while the upper limitis N650. The currency is allowed to fluctuate between these two limits. If the exchange rate reaches N650 the Central Bank comes in to intervene so that it does not go beyond the upper limit.
We cannot continue to bastardise our currency and expect economic development.
In addition to having a managed of fixed currency it is important for government to adopt some, if not all of these policies.
- A concerted effort should be made to change our consumption pattern; we need to consume home made goods instead of imported ones. Any amount spent on imported goods does not created employment in Nigeria, but in the importing country. The multiplier effects on the imported goods are negative in terms of employment creation in Nigeria.
- There is urgent need for export drive. We should not only try to increase exportation of mineral and agricultural resources, but manufactured goods as well. If we really want to develop and solve our economic problems, we should strive hard to revive most of our moribund industries such as textile industries, iron and steel etc. Effort should be made to increase range of our exports, agricultural and manufactured goods.
- It is an irony of fact that Nigeria, with favourable climatic condition for agriculture, still imports a large proportion of food items from abroad. The famous groundnut pyramids have vanished, palm oil, groundnut oil are being substituted with foreign vegetable or maize oil. Agriculture is one of the sectors that can create employment for the teeming youth, and can greatly contribute to the country’s Gross Domestic products.
We need agricultural revolution, and one is happy that the present administration has declared state of emergency on agriculture. In addition we also need to declare state of emergency on security. Many farmers had been sent out of their farms by bandits.
- Need to reduce cost of governance. Since the beginning of civilian administration in 1993, we introduced the Presidential system of government, instead of cabinet system of government. It had been argued by many patriotic Nigerians that this system of government is very expensive, because it does not only duplicate offices but also encourages the creation of unnecessary offices to serve political interest.
At the Federal level, during the last administration we had 43 ministers even though the constitution requires 36 ministers each per state. We have a bicameral Legislature, the Senate and House of Representation. It was alleged that in 2010, a Senator earned about 240 million as salary and allowances, ministers may earn more. The members of
House of representative were alleged to earn about N180 Million annually. Our legislators are the highest paid politicians in the world. Each state has both an Executive and Legislative arm, which cost billions of naira to maintain.
Under the current economic hardship, it is necessary to reduce cost of governance both at the Federal and State level.
- Rehabilitation of our oil refineries, and if they cannot be repaired, please privatize them. It is unfortunate that a lot has been spent on these refineries without result. The problem of petroleum products will continue to be with us if necessary actions is not taken on our refineries.
- The fiscal policy should have a human face, instead of increasing taxes, we should increase tax net so that more people who have not been paying tax be included. Astronomical increase in import duties should be revisited, because it fuels inflation in the country. This is not the right time to hike prices of electricity and other services consumed by the citizens.
In summary we need urgently to diversify the economy in order to have a sustainable development and also improve the welfare of the citizens.
- Dr. Lawal is an economist
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