Fuel Subsidies Must be Removed at All Cost – says Rewane

Mr. Bismark Rewane

The Chief Executive of Financial Derivatives Company, Mr. Bismark Rewane, yesterday said the federal government would have to remove both petrol and exchange rate subsidies if it must get the economy back on the right track.

He maintained that subsidies are distortionary and breed corruption in the system, adding that undue pressure on the local currency would disappear with fuel subsidy removal.

Rewane, who also affirmed that the country has a currency crisis, further argued that the exchange rate should be allowed to depreciate to find its real value, stressing that based on Purchasing Power Parity (PPP), the naira was technically undervalued in the interbank market and overvalued in the informal or parallel market.

Speaking at the opening of the 20th annual Central Bank of Nigeria (CBN) Seminar for Finance Correspondents and Business Editors, themed: “The Impact of Crude Oil Prices on External Reserves and Exchange Management in Nigeria”, holding in Calabar, Cross River State, Rewane also said the recent controls on consumption patterns occasioned by restrictions of forex on selected items by the CBN might not produce the needed results; after all, stressing that “the way to do business in the 21st century is to be competitive.”

Nevertheless, he said not removing fuel subsidies would only make the policy adjustment more painful, as fuel subsidy alone account for 30 per cent of the country’s import bill and form major sources of leakages in the system.

He also said if he were the CBN governor, he would rather quit should fiscal policy run contrary to what he expects it to be.

“The truth is that refineries were producing before subsidies were introduced. Subsidies are a gap between the price and the cost. Even if you produce at the refineries and you are selling at below the cost of production, then you create a subsidy."

“Subsidies are distortionary: first of all, get rid of the system so it doesn't breed corruption and if there are no subsidies, with the price of oil today at $52 per barrel, this means that you might actually find that the price of petrol may be lower than what it is today."

“So there’s no question – and let us separate the issues – the subsidy is a number; the subsidy system is a system that breeds corruption, get rid of the subsidy system and then the number will be an efficient number,” he said.
According to him, “The truth is that if the currency is mispriced for any reason, then we have to address that reason why it is mispriced. So if that is done because of a fiscal crisis that we have, the fiscal crisis is not because of the currency, the fiscal price is because our revenues have dropped.”

“And if our revenues have dropped, you either cut down expenditure or you stimulate the economy with borrowings and other things and now jumpstart the economy."

“Almost all oil exporting or commodities producing countries are facing the same issues and how you deal with it depends on how courageous you are to deal with the problem and the timing."

“So I submit that our fiscal issues include subsidies, spending, fiscal recklessness and corruption. If you deal with all these, the monetary suitability will follow to reinforce the fiscal policies that you have adopted.”

On his opinion on the recent policy excluding some items from accessing the official forex market, Rewane said: “Fiscal policy is the responsibility of the Ministry of Finance and restricting the consumption or production of goods is a 19th century way of doing business; the way to do business in the 21st century is to be competitive.

“If the price is competitive, people would buy it and if the price is not competitive, they will smuggle it. In any case, when they want to hit it, they will hit it."

“So I believe that if there’s an efficient price of the currency, if there’s efficient price of factors of production, then you’ll find that you’ll not need to administer or control people’s production and consumption – people will produce and consume those things which they think is in their own best economic interest.”