Fuel Subsidy Removal will reduce pressure on Naira – FDC

Analysts at the FDC however said that the gains of removing the subsidy would be long-term instead of short-term.

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A trader changes dollars with naira at a currency exchange store in Lagos February 12, 2015. REUTERS/Joe Penney play A trader changes dollars with naira at a currency exchange store in Lagos February 12, 2015. REUTERS/Joe Penney
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The Financial Derivatives Company (FDC) has said that the removal of fuel subsidy in Nigeria could reduce the pressure on the nation’s currency and even lead to long-term appreciation.

Analysts at the FDC however said that the gains of removing the subsidy would be long-term instead of short-term.

“More importantly, because there is an inflated import bill due to the subsidy scam, subsidy removal will reduce the pressure on the currency and the naira will appreciate in the medium term”, they said in recently issued FDC Economic Bulletin.

“Subsidies are reverse taxes and if removed will reduce the disposable income of consumers in the short term. However, it will result in an efficient redistribution in income, spur a rehabilitation of the refineries and an efficient oil industry in the long run; short term pain but long term gain”, they added.

The bulletin, titled “Petroleum Subsidy Scam: The Raping of Nigeria”, continues:

“The benefits associated with a subsidy removal are usually long term which will be solely determined by how the appropriated subsidy funds will be utilized to support optimal productivity within the economy.”

“If the subsidy were removed today, the pump price would jump to approximately N130, which is the total open market price when one considers both the landing cost of petrol at N115.77 and the margin for transporters and exporters of N15.49 as of May 10, 2015.1 However, the pump price would be guided solely by global oil prices and would not be at the mercy of oil marketers.”

Nigeria suffers from frequent fuel scarcities, the most recent of which was caused by striking marketers and nearly crippled the country’s economy.

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