Say it will remove distortions, rent-seeking from economy – The proposed removal of fuel subsidy by the Federal Government has been applauded by local and international analysts, saying the move, if ratified by the National Assembly will reduce distortions and rent-seeking in the economy.
In economics, rent-seeking is an attempt to derive economic rent by manipulating the social or political environment in which economic activities occur, rather than by adding value.
According to them, the availability of fuel subsidy has not in any case meant the availability of fuel all the time, and that even when it was in supply, it was never available evenly everywhere at the subsidised rate.?
Razia Khan, Regional Head of Research, Africa, Standard Chartered Bank, London in response to Leadership questions said there was an urgent need for increased interventions in infrastructure to steer Nigeria’s economy in the direction of lasting economic growth.
She explained that the removal of the subsidy should free the space for other crucial spending which the economy is in desperate need of, leading to a win-win.
She however said that, although inflation could? be expected to tick higher temporary with the removal of the subsidy, it is expected that this will lead to more monetary tightening by the Central Bank of Nigeria (CBN), helping to ensure eventual price stability.
“More importantly, demand for foreign exchange (forex) from the oil sector – some of it legitimate, some of it questionable, should fall with the removal of the fuel subsidy, helping to safeguard forex reserves and the stability of the naira, for the good of all Nigerians”, said Khan.
She continued: “A bold step and significant move for which Jonathan and his economic team should be applauded … This is a good sign”.
Bismarck Rewane in his recent monthly economic news and views at Lagos Business School Executive Breakfast Meeting, said price adjustment was inevitable if fuel smuggling was to be stopped. According to him, the move will encourage new investment in refining capacity.
Rewane said at the United States; fuel is sold at $3.85 per gallon, approximately 95 cent per litre, while in Nigeria it is sold at N65 per litre or 40 cent per litre. At that estimate, if fuel subsidy is completely removed, a litre of fuel will sell at N154.375.
Rewane said he expects either subsidy reduction or outright subsidy removal. The adjustment options impact on Premium Motor Spirit (PMS), according to him would evoke a price-tag of between N100 – 120 per litre if there is subsidy reduction or a price in the neighbourhood of between N165 – 200 per litre if the government embraces subsidy removal.
In any case, he expects that the removal or reduction would impact positively on government revenue, guarantee new investment in downstream petroleum, revamp and rehabilitate pipeline infrastructure and storage, as well as increase sectoral linkages.
On the flip side, he said the reduction in fuel subsidy or outright removal will automatically escalate automobile transport costs in the short run, and that opposition will capitalise on the bitterness.
He said the removal of fuel subsidy may lead to building a coalition of the disgruntled, while inflationary impact will likely?? undermine the naira.
Samir Gadio, analyst with Standard Bank, London said if government goes ahead to phase out fuel subsidy in 2012, there would be some initial hike in inflation, more significantly in regions like Lagos and Abuja where the cap on fuel prices is the most effective.
Gadio said the timing is somewhat appropriate, considering the expected decline in oil prices in coming months. According to him, that will mitigate the magnitude of the forthcoming fuel price adjustment.
“Meanwhile, the new framework should theoretically create fiscal space for additional development and infrastructure related spending if the level of execution in capital expenditure improves in coming years and help gradually rebuild government savings”, he said.
Gadio added that deregulating fuel prices will eventually structurally boost the incentive for the private sector to get involved in petroleum refining.
Austin Otupo, an analyst based in Lagos said the move will ensure that the few that fed fat on fuel subsidy no longer benefit from policies meant for the masses. He expects such group of people to be very bitter.