The Minister of State for Petroleum Resources, Ibe Kachikwu, recently, announced a new petrol price of N145/litre. Kachikwu was however, clearly cautious to avoid a definite declaration that the petroleum downstream sector had become fully deregulated with the almost 60 per cent increase in petrol price. Nonetheless, the seeming price dictatorship is clearly inconsistent with a deregulated market. Conversely, however, organised Labour insists that until the act which established the Petroleum Products Pricing and Regulatory Agency is repealed, it will be judicially indefensible for Kachikwu to unilaterally announce a price not approved by the PPPRA.
However, in place of centralised price control, possibly, the existing Consumer Protection Council could be empowered to ensure that the fuel market is not cartelised to sustain oppressive price levels. Consequently, government must acknowledge that the proposed stakeholder consultations on fuel price may also be counterproductive and an anathema in a fully deregulated market.
The Group Managing Director of the Nigerian National Petroleum Corporation boss was however, inexplicably, silent on the retention of N83/litre price for Kerosene. Although this retention may be in consideration for the poor, nonetheless, Kachikwu must be aware that with the cap on petrol and kerosene prices, the current rent-seeking distribution chain will invariably subsist and subsidised prices will also prevail.
Consequently, with this pseudo “deregulation”, the minister’s announcement that anyone with capacity can now import and sell petrol, may unfortunately, not attract enthusiastic response from fuel importers. Furthermore, marketers will refrain from imports if a “deregulated” pricing template with a prescribed dollar price of N280=$1 does not guarantee adequate profitability to sustain their business, particularly, when naira depreciations have also almost doubled the burden of funding fuel imports.
Although, the NNPC GMD indicated that importers would source forex at about N280=$1, he did not explain how the parallel market rates would be restrained below this ceiling, particularly when fuel marketers, who traditionally consume almost 40 per cent of the Central Bank of Nigeria’s total forex supply, ultimately, descended on a more modestly funded black market for the billions of dollars required for fuel imports.
Invariably, deregulation of the petrol market, will remain inchoate with severe market distortions, if fuel price and the applicable naira exchange rate for petrol imports are centrally regulated. Furthermore, the surge triggered by fuel importers for parallel market dollars will probably exceed demand and further spike the dollar exchange rate. Indeed, if, for example, dollar sells for N300 and above, instead of the prescribed N280=$1, import bills will obviously also rise and make N145/litre petrol price unsustainable. In fact, unless the N145/litre price cap is lifted, marketers will refrain from direct import. In such an event, the NNPC may once again become the sole importer. However, the NNPC may not be comfortable with such change, as the retention of N145/litre for its petrol stocks, despite increasing naira depreciation, will inevitably bring back subsidy, and we may, once more require a supplementary appropriation bill to fund unbudgeted petrol and kerosene subsidies in 2016. Sadly, the profligate subsidy disbursement would inadvertently return with a vengeance of about 100 per cent of the current N145/litre regulated price.
Worse still, if crude oil price continues to rise beyond $50/barrel, we will ironically, in place of relief, certainly become apprehensive that the increased revenue from such fortuitously higher crude oil prices will “unfortunately” also make the retention of N145/litre price cap impractical without subsidy. Consequently, petrol price may once more be hiked beyond N145/litre or alternatively fresh subsidy will be reintroduced as crude prices further rebound.
Indeed, in several African markets, where deregulation exists, the average pump price is about $1/litre, irrespective of whether these countries export crude oil or not. Consequently, an extrapolation of this price range would bring deregulated pump price close to the naira equivalent of $1. Thus, if Nigerian importers access dollars at N280, they would in turn, probably sell petrol for between N240 and N300/litre. Furthermore, if dollar costs N300 for fuel imports, the domestic pump price will also rise accordingly. Thus, lower naira exchange rates will inevitably trigger higher petrol prices in a conventionally deregulated market.
Thus, the only plausible resolution to inflationary and oppressive fuel prices may in fact be a stronger naira exchange rate. For example, if fuel importers purchase dollar with N100=$1, fuel pump price may not exceed N100/litre. Consequently, up to N45/litre (about N2bn from 40 million litres daily consumption) can be recovered as petrol tax, if petrol price remains at N145. Evidently, the additional N800bn annual revenue (over 12 per cent of 2016 budget) will go a long way in remediating our decayed infrastructure.
It may seem nonsensical to suggest a stronger naira exchange rate, when it seems apparent that unless we earn more dollars, it will be inappropriate to expect a stronger naira. Nevertheless, no one has satisfactorily explained why the naira exchange rate remained almost static all through the preceding bountiful years of premium crude prices, when Nigeria’s dollar reserves also exceeded $60bn and the CBN liberally funded outflows of $150,000.00 annually for spending abroad, with personal naira denominated debit cards, when in fact over 100 million Nigerians earn less than N1m ($5,000) annually.
Media reports of the gross abuse of the CBN’s controversial dollar liberalisation, include the weekly funding of over 3000 BDCs with $60k; the case was also reported of a young Nigerian male, apprehended at an airport abroad with over 100 debit cards, while several other Nigerian tourists have also been apprehended with millions of dollars cash en-route from Nigeria. Indeed, only an archenemy of Nigeria could have come up with such a disingenuous way of emasculating our currency and destroying our economy and values. It is regrettable that our best ever external reserves, which reportedly provided over 20 months imports cover in recent years, did not rescue the naira.
Similarly, even if crude oil revenue, again, unexpectedly spikes significantly, the expected increase in dollar revenue and reserves may not also, as in the past, translate to a stronger naira. Furthermore, the substantial additional export revenue we anticipate from successful diversification of our economy, will realistically, unfortunately, still take between three and five years to materialize. That is, if the enabling monetary indices of inflation and cost of funds below three per cent and seven per cent respectively subsist. In this event, pressure on the exchange rate will persist for some time and higher and higher fuel prices in excess of N200/litre will inevitably prevail.
Undoubtedly, the naira’s lowly fate will remain sealed and fuel prices will continue to spiral for as long as the CBN continues to auction dollar rations for higher naira bids, in a market that is undeniably, already awash with surplus naira liquidity. Unfortunately, the excess money supply invariably, compulsively instigates CBN’s oppressive high cost liquidity mop up operations, notwithstanding the inherent drawbacks of crowding out the real sector from cheap funds, and further restraining SME’s ability to increase productivity and create more job opportunities.
So, if we cannot improve market dollar supply, in the short term, to strengthen the naira, we urgently need to identify the main cause of the eternally surplus naira that instigates inflation and weaker Naira exchange rate at the CBN’s dollar auctions. Our continued denial of this reality will condemn any hope of inclusive growth or a diversified economy. Furthermore, unemployment and inflation rates will sadly remain unbridled and pose increasingly serious threats to our social welfare and national security.