Labour Strikes: Expect Many More, Unless …!

Fuel Scarcity
It would be mischief on the part of this column if we subscribed to the bandwagon of elitist Nigerians whose stock in trade is the creation of false hope of a better year ahead at the end of every dismal year.

If truth be told, poverty has ravaged the vast majority of our people such that in spite of increasing dollar reserves, over 80% of Nigerians are believed to live on less than $1 a day, and our country is now listed amongst the world’s poorest nations.

The reality is that we have no right to expect any change for the better since no serious attempt is being made to tackle the main cause of our inability to turn our best ever harvest years into a sustainable platform for improved social welfare for the majority of our people.

The 2010 federal expenditure budget is just a little over N4000bn! Meanwhile, about N2500bn will be allocated for recurrent expenditure such as salaries, and allowances for the sustenance of the welfare of less than 1% of Nigerians, while the sum of N1500bn is projected for capital expenditure; a significant portion of which will be looted by public servants!

In view of the persisting impasse on the issue of deregulation of the downstream oil sector, it is doubtful if government has the spine to bulldoze full deregulation, as any truce brokered to permit deregulation will inevitably collapse with further increase in crude oil prices. Not even 20 more refineries, or indeed, any form of palliative will be sufficient to rescue the inflationary spiral and the predictable failure of deregulation once oil prices rebound.

In this event, projected subsidy payments may exceed N500bn, (note: according to Energy Minister, subsidy of N15000bn paid between 2008 – 2009) leading to further reduction of the already meager capital expenditure vote and/or increased budget deficit over and above the already alarming projection of N1500bn for 2010! The net result will be further pain and gnashing of teeth for more Nigerians in a climate of increasing inflation and insecurity!

In January 2010, the above text was written as preface to our article titled “Labour Strikes: Expect Many More, Unless…” This article was originally published in June 2007. Four years later (July 2011), it is clear that the twin problems of fuel price hike/subsidy removal and low minimum wage still remain the main instigators of Labour Strikes in our country.

Even though Labour maintain that N50,000 initially demanded would barely equal the purchasing power of the minimum wage of N250/month over two decades ago, the NLC and TUC eventually agreed to settle for N18,000, and this amount was subsequently adopted and endorsed by an Act of parliament in March, just weeks before the 2011 elections.

Even if the executive and Legislature appeared stampeded by Labour’s threat to thwart the peaceful conduct of the elections, the reality of implementation appears to have ignited discord, as most of the State Governors (both returning and first termers) now claim that their current projected income cannot accommodate such level of wage increase unless the revenue sharing formula is amended to increase state allocations and or unless fuel subsidy is abolished so that more revenues can become available to the second and third tiers of government.

Meanwhile, it is clear that with incomes losing purchasing power at over 10% per annum, inflationary rate of about 15% for the average family food basket, and with the removal of fuel subsidy and its attendant inflationary spiral, the future might just be a hill too steep to climb. The same dilemma, which confronted former president Obasanjo and the Late Yar’Adua have become magnified as earlier predicted in 2007.

The simple solution proffered in that article to reconcile the paradox of rising crude prices, increasing dollar revenue, galloping fuel prices and depreciating naira and incomes remains relevant and practical. Excerpts from that article are once again reproduced to encourage government to recognize the truth, and save Nigerians from endless avoidable pain and deprivation. Please read on.

“ The coalition of Labour Unions and Civil Society Groups made good their threat to embark on an indefinite general strike after the expiration of a 14 day ultimatum to government for the reversal of clandestinely imposed increases in fuel prices and VAT by the expired Obasanjo administration in May.

The coalition also demanded a cancellation of the sale of Nigeria’s refineries and the implementation of a 15% pay rise for workers. As usual, government delayed negotiation with the unions until a day before the expiration of the ultimatum and belatedly acceded to most of Labour’s demands but stalled on the issue of an additional N5 on the existing fuel price of N65/litre!

“A cursory observation of the framework of our economy suggests that domestic fuel prices move in sympathy with increases in the international price of crude oil, which in turn has risen from below $30/barrel to its current level of about $70/barrel in the last 8 years; such a sympathetic price relationship would be expected in a country without commercially viable crude oil reserves.

On the other hand, Nigeria, with the enviable endowment as a major exporter, increasing crude oil prices should mean increasing export or dollar revenue as evidenced by our burgeoning reserves in the last 6 years or so, when we were able to exit our, some say, debatable debts of billions of dollars with international creditors and still boasted of idle reserves approaching $50bn.

“Expectedly, our healthy reserve profile under a democratic and relatively stable dispensation should lead to a much stronger naira than N80=$1 in 1996, because, as crude oil prices rise, our naira should also rise in value and this should translate to stable or lower petroleum product prices. Let us take a simple example: if crude oil is, say, $30/barrel, this would translate to N3,000/barrel at an exchange rate of N100/$1; an increase in crude oil to $60/barrel would fetch us double our erstwhile revenue at the same output and swell our reserves/savings.

If our consumption pattern does not change significantly, our exchange rate should improve against the dollar by up to 50%, and the barrel of crude oil will still cost the same N3,000 (that is, no change in local price, in spite of 100% increase in international oil price!). If, however, the dollar falls below N50=$1, then of course, the domestic price of fuel will be less inspite of rise in crude price. (You may substitute pump price/litre for crude oil price in the above example and the result will still be the same).

“If, however, the international price of crude continues to increase, and inspite of our resultant heavier export earnings our naira exchange rate to dollar resists appreciation and shows an increasing propensity to depreciation, (especially when the dollar is falling against other currencies) then of course, our petroleum product prices will move upwards and create a burden for the economy. Unfortunately, this is the prevailing economic framework that our government has adopted in the last eight years with devastating consequences for our people.

Within this context, we may have to look to our future with trepidation as crude oil prices are expected to continue on the rise and probably exceed $100/barrel before 2010. Inspite of the huge revenue we would derive from such fortuitous price movements, we should expect many more upward movement in petroleum product prices and many more general strikes to defend the depreciation on income values brought about by inflationary push!

nt Yar’Adua, like Obasanjo is confronted with a self destructive dilemma: price hike every time crude oil prices rise, will continue to invite wasteful and destructive strike actions and impede government’s efforts to revive the economy. At the same time, resistance to a price hike in the face of inevitable rise in crude prices would mean increasing value of subsidy of petroleum products; such subsidy could easily exceed 33% (about N500bn) of the federal expenditure budget before 2010!

This would constitute a colossal drain on our resources at the expense of infrastructural enhancement; NNPC may not survive with such leakages, and private investment in the downstream sector of the petroleum industry will continue to be just a wish as refinery operators, and independent fuel importers would be reluctant to sell their products below cost and hope to receive commensurate subsidy from government some time in an undefined future.

“It is clear that President Yar’Adua cannot rely on the failed advices of experts in the last administration to resolve the inexplicable dilemma of price hikes and subsidies and the paradox of so much poverty at a time of our best-ever export earnings! Mr. President will be better advised to resolve the puzzle by looking towards the instrument of a much stronger naira; as earlier demonstrated, a stronger naira will automatically bring down petroleum product prices even when crude oil prices rise!

I would strongly recommend that a significant appreciation (not stability) of naira to double digit should be an initial objective of Mr. President in the short term. In the medium to long term, we could restructure our currency by knocking two zeros off each denomination and subsequently realign naira to a rate of N1=$1 (in the same manner that 0.94 Ghana cedi = $1 from July this year!) (2007).

“This would, no doubt, promote and facilitate convergence and adoption of a common currency in the ECOWAS sub region, but more importantly, it would give value to our currency and even kobo coins would command value, petrol prices will fall; in place of subsidy, government will earn petrol tax.

Petroleum prices will become truly market controlled and private refinery operators will thrive, much needed capital machinery and raw materials would become cheaper in naira terms, production and capacity utilization will expand, more Nigerians will be employed, creating their own consumer demands; high employment will reduce insecurity, and minimal inflation will prevail. We are confident that a stronger naira will quickly emerge once CBN adopts the instrument of dollar certificates for the monthly settlement of dollar denominated revenue in the federation account, instead of first, unilaterally converting such revenue to naira before sharing.

The longer it takes to recognize this simple market economics compliant solution, the greater will be the dislocations in our economy, and the poorer our people will be in the face of plenty, and the more foolish we would all look in the eyes of the world!”

For five years, Soludo was in brazen denial of the solution proposed above until August 2007, when he bowed to superior argument; regrettably, he could not convince President Yar’Adua of the wisdom in printing fresh currency denominations to replace the expensive new currency profiles earlier introduced in first quarter 2007 with much fanfare!

Les Leba, writes from Lagos.

Please check features column of the Economic Confidential to read more articles and rejoinders on the Fuel Subsidy Palaver


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