We learned last week that the drivers of the new power tariffs in Nigeria are the exchange rate of the Naira to the US dollar and inflation.
The exchange rate and inflation rates are where they are in Nigeria because of the federation’s policies. For instance, the exchange rate is tilted towards a weak naira because the supply of $ from oil exports has fallen below historical lows. In essence, the inflation and weak Naira are products of a failed executive management of these variables by the federal government.
The Dollar exchange rate today drives Import duties: power prices and Fuel prices. If the federal government desires a subsidy that will be transmitted 100% without leakages, it asks its agencies and owned entities like the Customs, NERC and NNPC to adopt a $1 to N100 exchange rate from tomorrow for 90 days only. This exchange rate subsidy will cause prices across Nigeria to crash, boost consumption of goods and services and freeze inflation in one week!
But wait, Kalu, if Customs and NNPC use $1 to N100, that’s a subsidy,
Yes, but there is ALREADY a subsidy paid on PMS; reports say as much as N17b is spent on PMS subsidy daily! An ongoing palliative involves rice and CNG buses funded by the federal government. This proposed exchange rate subsidy does the same thing; it costs the federation cash to reduce costs.
The real difference with this 90-day “pause” is that it transfers the decision on where to spend the subsidy from the Government to the people. Thus, instead of the Federal and States receiving billions as palliatives, the Federation cuts the cost of services in Nigeria by artificially fixing the exchange rate and transferring those savings to the people directly. A household in Nigeria will then spend lower on food, fuel and power; that’s a cut of nearly 67% of household budgets.
This consumption boost is needed to reflate the economy from the ground up directly. This proposal can be made “tomorrow” before lunch, and it will reflate the economy faster than any current or previous palliative.
It’s 90 days, it’s targeted, it will cut costs guaranteed, and it can be scaled. The FGN can add JAMB or NAFDAC to a list of services that will cut their prices for 90 days to boost local consumption.
This is worth trying; it may probably be cheaper than buying rice from the local market, which drives up food inflation.
Do follow on @finplankaluaja1
Kalu A. Aja