During the period of the Great Depression, farmers were asked not to produce and they were paid for not producing. This intervention was carried out to stop food prices from falling; and to protect smallholder farmers. The two American presidents (Herbert Hoover and Franklin D. Roosevelt) both set price floors on agricultural products so that farm produce would not become tons-a-kobo. In 2005, Indonesia more than doubled fuel prices; while in 2008, the country increased fuel product prices by 25-33 per cent. What was realised through this measure were used to finance a cash compensation program to 15.5 million poor families. Jordan also adopted and implemented this mechanism that same time. It was a huge success for the two countries that shows how government can effectively use social safety nets as part of measures to reduce impacts of shocks when carrying out economic reforms.
After the inauguration “subsidy is gone” statement and the purported unification of the foreign exchange rates, thereby causing sudden increases in prices of goods and services and the attendant multiplier effects, the news broke, days back, that the federal government had paid about N169.4 billion as fuel subsidy payment for the month of August 2023. Not a few people went to town asking “is subsidy back” or making emphatic “subsidy is back” statement. Daily Trust Newspaper wrote, “a document by the Federal Account Allocation Committee (FAAC), sighted by our reporter showed that in august 2023, the Nigerian Liquefied Natural Gas (NLNG) paid $275m as dividends to Nigeria via NNPC Limited. NNPC Limited used $220m (N169.4 billion at N770/$) out of the $275m to pay for the PMS subsidy. Then held back $55m, illegally”. The propriety or impropriety of this transaction is not the focus of this piece but, that if the ‘$220m payment’ happened, was it a subsidy or a price stabilization mechanism?
Two factors drive the market price of premium motor spirit (PMS) supply in Nigeria: crude per barrel price and foreign exchange rates. In a liberalised, subsidy-free market, the price that consumers will buy PMS will never be static since the demand and supply situation of forex will always determine exchange rate. Where the supply is lower than demand, FX scarcity will occur and exchange rates will always go up. It becomes a double jeopardy for an import-dependent supplies if the crude oil price in the international market is also going up. When this is happening, the next question is what should a government do: watch the continuous increase in pump price as being tossed incessantly by the rising forex rates and crude price rates (free market, capitalism system) or intervene to temper the pump price? As I once explained in my piece titled, “The Shocks And Bitter Pills Of A Free Market Transitioning”, at this state of economic reform, it will be difficult for Nigeria to operate full-fledged capitalism and sellers’ market. The country is not yet producing the essential commodities locally, and with very high probability for monopoly, oligopoly and untamed supernormal profiteering, Nigeria must adopt a mixed economy model by finding somewhere (a location) not too far away from pure capitalism on one end on a continuum that has socialism on the other extreme side. It is only a government that is ready to crash that will watch, without doing anything, the market forces set the country on fire and/or allow a spontaneous revolution pulls down the rooftop to collapse on its head. Therefore at this juncture where Nigeria had failed to adequately prepare for its economic reforms, it will be foolhardy for the government not to come up with very necessary, imperative and critical interventions through price stabilization mechanisms.
Subsidy is a form of assistance provided to encourage and improve economic activity by the government to make goods and services available to consumers at reduced prices so as to ease economic burdens on producers or suppliers, and especially on individuals. Another of such interventions is cash awards or food distribution (which is hardly effective as a result of many logistic loopholes). Evaluating the success of government interventions, a subsidy or price stabilisation mechanism will remain a failure if it fails to stimulate local production, tempered costs of living, improve living standard and advance the overall economy. Therefore, whether direct or indirect subsidy interventions, and notwithstanding whether it is production, consumer, taxation, export and imports subsidization, it must be seen that government is not only assisting struggling industries, encourage new developments, it must be felt by all and sundry that the local manufacturing companies as well as local producers of goods and services are protected; and MSMEs are well stimulated with good policies that will create immediate boom in local production. Failure to do this within the next few weeks, it is an unconscious invitation to lawlessness and unrest. It is a brutal fact.
Ola Emmanuel is a business planning consultant