News reports have it that the government has finally cut off fuel subsidy. Normally, that should excite me. Something doesn’t feel right, at least for now. Hopefully a detailed government rationale behind this would come out soon enough.
Global crude oil price has dropped by over 60% from 2014, and it’s still dropping. By some predictions, it may drop further to $20.
So naturally, refined fuel (especially PMS) should become cheaper and in surplus, since the price of the raw material has significantly fallen. Under such circumstance, paying subsidy would be unnecessary.
But this is neither happening today neither is this the reason government has cited for scrapping subsidy as far as news reports go. PMS is scarce, and where it is found, it sells at shocking high prices. And that’s why I am alarmed. According to news reports, the government says that we can not afford subsidy now due to a depleted treasury, hence it’s being taken off.
I ask, “What is the plan if some freak economic event makes the price of crude oil (the raw material) jump back up to $100? Do we reintroduce subsidy then? Freak events that could trigger such wild jumps include a break down of supply in major oil producing States like Russia, Iraq, Iran and Saudi Arabia. Take note, the OPEC hasn’t cut oil supplies yet. It is only a matter of time before they do so in a bid to get more favorable prices for crude. Also, there is no complete certainty that shale oil production is sustainably competitive at the moment. There is a possibility, however small, that the system could suffer minor to major break downs which lead to increase in price of crude oil.
In the case of a jump in price of crude oil, we will have bigger profit margins from our crude exports, expanded foreign trade and earnings, and therefore more money in the treasury. But then, the final price of the refined product would also make a jump. If our plan is to reintroduce subsidy at that time because we would be able to afford it, I don’t think it is good enough. It means we are merely reacting to market forces and trying to manipulate those forces by heavy government control. We will get some benefits immediately, perhaps lasting two years. That is if those market forces stay docile. History shows that market forces sooner or later rebel against direct government control.
I suggest that the government should develop an economic plan that removes subsidy with a grand aim to reinvest those funds, block leakages, encourage transparency and free market entry in that industry, and then drive up and protect local and foreign investment in the field.
This plan is reverse-austerity. It would be austere because removing subsidy may lead to greater scarcity and further hikes in fuel price. But this could be mitigated by proper monitoring and system auditing. This would curb hoarding. It would also expose and correct subtle and dubious inflation of cost prices. As it is, the government says that PMS should not sell as high as it goes for now. Clearly, hoarding, marketers’ speculation, and inflated cost pricing are the culprit here, not non payment of subsidy. If subsidy removal is carefully executed, fuel would be abundant and the price might stabilize at current prices or slightly lower. That’s the austere part and we are already enduring it.
Next is the reverse:
Government should keep spending as much as it would if it were paying subsidy to fuel marketers, but then, the money would be going in part, not to pay up salaries or clear debts, but to improving our capacity to refine and distribute locally. That unskilled,but reallocated spending would stimulate new investments in the sector, and other complementary sectors like transportation, storage and distribution facilities, etc.. I am glad therefore that the government in presenting the 2016 budget announced that it would spend it’s way out of lack. That requires deep thought and carefully executed strategies.
There is still plenty of room to see crude oil price revive. The situation is not bleak. And we have to approach it as such, planning and spending with the big picture in mind. We may have to take new loans. Taking out loans is never a problem to an excellent business man. Taking smart loans to boost our economy and to prevent collapse of social welfare would be a great thing to do if we have a great and well coordinated economic and financial team in government. I believe we do.
With such plans in place, we can be sure that we are not on a path to turning fuel subsidy on and off in panic response to market trends. We can be sure that we on a path to sustainable economic recovery, growth, development and diversification.