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‘WETIN’ CONCERN NLC/TUC WITH FOREX MARKET? (2)

BY: LES LEBA
In spite of Organised Labour’s recognition of the real advantages that a deregulated downstream oil sector would bring to the economy, there is yet no sign that Labour’s opposition to this policy has waned!  Labour, of course, recognizes that NNPC (Nigerian National Petroleum Corporation), like all monopolies (especially state run monopolies) create price and market distortions which do not generally favour the masses. 

Thus, even when it is clear that deregulation will not only release at least N600bn revenue annually for critical infrastructural upliftment, but also reduce the space for corrupt enrichment within the petroleum subsector and induce keen competition with improved consumer services, Labour is not convinced that deregulation would translate into cheaper or stable petrol prices, especially when global crude oil prices follow an upward trajectory.

In truth, this column shares Labour’s apprehension and I will even make bold to say that any assurance from any quarter that deregulation as proposed in its present jaundiced form will bring down petrol prices from its current level even when crude oil prices continue to rise must be a calculated attempt to deceive Nigerians, before our income values are taken to the cleaners!

Indeed, Deregulation within the context of our current monetary framework will be suicidal!  In their eagerness to encourage Labour to embrace deregulation, government and its agents have been quick to point to the gains in the telecom sector with the advent of liberalisation.

In truth, prices of mobile handsets and cell rates have tumbled endlessly over the past five years and Nigerians are urged to be patient so that the same favourable scenario would play out in the downstream oil sector; but, sincere and insightful analysts will be quick to caution against such expectation.

In the first place, competition may indeed have impacted favourably on consumer prices, but the more important fact is that it is the increasing size of the market (the cost benefit of mass production/service) that has been the main driver of the favourable prices!

Secondly, and certainly of equal significance, price reductions are made possible with an expanding market in the telecom sector by the nature of its revenue base; for example, telecom operators receive their incomes in local currency (i.e. naira) from Nigerian based customers, and furthermore, the telecom operators do not have any direct influence on the determination of the naira purchasing power!

Meanwhile, deregulation of the downstream sector may mean more suppliers, but the demand for petrol as in the case of telecom is unlikely to enjoy an astronomical increase, so the relatively static size of local demand for petrol will not increase and thereby instigate the cost savings that will ultimately reduce prices of petrol, especially when the crude oil market is buoyant!

Thus, more refineries with increased capacities and an influx of importers will not necessarily increase demand such that prices will come down with the advantages of large scale production.  Furthermore, it is clear that the universal driver of petrol prices is actually the international crude oil price movements.  This is certainly the most significant factor in the pump price of fuel.

Yes, the distance between refineries and the market, and the index of efficiency in each refinery would also contribute to the price level, but in reality, these two factors may not account for  more than 20% in the price structure of petrol; however, the most critical factor that could induce wild swings in petrol prices is certainly the market price of crude oil.

The price of crude oil is, however, denominated in dollars and unlike telecom, our export revenue is consequently received in dollars and not in naira.  Meanwhile, the naira value derivable from this dollar revenue is in turn determined in a market which is inexplicably dominated and controlled by the worst form of monopoly (i.e. government parastatals).

Thus, the foreign exchange market which determines how much our hard earned dollar income will command in the market, by its monopolistic nature, is plagued by price distortions, corruption, and market dislocations!!  In spite of vastly increased export revenue, the monopolistic posturing of the Central Bank in the foreign exchange is in fact at the root of our underdevelopment!

The CBN in its role position as the nation’s banker is the prime custodian of our currency; i.e. the naira, and it is appropriate that it controls all naira issues and it is, by its mandate expected to maintain price stability which also includes an appropriate monetary framework which ensures that the naira we all earn does not continue to buy less and less in the market!

Thus, while a Central Bank’s monopoly of a nation’s currency issue and management is universally accepted as inevitable, the waters become seriously muddied when the same Central Bank becomes not only a major player but also a monopolist in the supply of foreign exchange to the domestic market; this would lead us into a very poisonous matrix that guarantees that our people become poorer with increasing dollar export revenue.

Currently, the CBN is annually responsible for about 70% of all dollar revenue that enters into the domestic forex market.  The balance 30% or less is supplied by oil companies and a few exporters outside the oil sector!  While these private dollar suppliers are legally permitted to approach the banks directly for the exchange of their dollars to naira, the owners of public sector dollar revenue in our reserves are not so lucky!

Over the last three decades or so, the CBN has played the role of the all-knowing big brother with our dollar earnings.  In the present framework, the CBN actually captures the monthly distributable dollar revenue, and proceeds, with no serious attempt at a market-determined naira/dollar rate, to print and supply loads of naira to the three tiers of government at its own unilaterally determined exchange rate!

Consequently, with such framework, increasing dollar revenue will mean increasingly worthless naira value, as more and more naira will be pumped into the system with the attendant problems of excess liquidity, high interest rates, heavy government borrowing (not for infrastructural development but for reduction of excess cash in the system) increasing unemployment, lower demand and comatose industrial landscape as a result of CBN’s monopoly of the people’s dollar revenue!

As you may imagine, the above is a veritable paradox, as increasing dollar revenue (whether from crude price rises or additional export revenue) should realistically improve the value of the naira if the increased dollar revenue provides us with longer forex demand cover.  For example, our $60bn or more  reserves in 2008 gave us over 30 months demand cover according to CBN and our exchange rate hovered between N120 – N150=US$1, but compare this with our $4bn dollar reserves and four month’s demand cover in 1996 and yet our naira exchange  in 1996 for just N80/$1.

Some Nigerians have argued that crude oil is our natural endowment and we should therefore enjoy a subsidy akin to agric product subsidies elsewhere in Europe and U.S.A.  Thus, even if a subsidy regime cost us N1000bn a year (a third of federal budget) or indeed breeds corruption and dislocates the price structure, such Nigerians maintain that subsidy is our birthright!

I do not have any quarrel with this argument, but the point is that the concept of incidence of subsidy is misplaced in this instance.  It should be a realistic expectation that when crude oil prices increase, our nation’s treasury benefits with increasing dollar reserves, which would in turn improve our dollar demand cover; when dollar demand cover improves as per the above example, we should rationally expect our naira to be stronger against the dollar!  A stronger naira, with rising crude oil prices should normally translate into reducing petrol prices locally!!

The cheaper petrol prices will, however, mean higher cost to all cross boarder smugglers of petrol who have contributed to push our daily consumption of petrol over to 30 million litres!  What our economic experts do not tell you is that the resultant stronger naira, cheaper petrol prices, the damper on inflation, and a savings of N600bn erstwhile subsidy are actually the real subsidies that ownership and export of crude oil provides!

The so-called N600bn annual subsidy is a farce and contributes  significantly to the destruction of our economy!  The real subsidies that would impact positively on our economy when crude oil prices rise, are increased dollar reserves, stronger naira with cheaper consumer prices, increased employment, increased capacity utilisation, increased consumer demand and a general improvement in social welfare and security.

So, this is the missing condition, if Labour must support deregulation without regret in the future, the CBN must be propelled to embrace a deregulated foreign exchange market.  In such a market, beneficiaries of public sector dollar revenue will be paid with dollar certificates (strictly not cash).  These dollar certificates can then be individually exchanged by constitutional beneficiaries from registered commercial banks!  This approach will become a soothing balm to the economy and to the masses as we will begin our march out of the pits of poverty into which we have sunk.

In conclusion, we reiterate that there can be no enduring deregulation of the downstream sector of the oil industry without first deregulating the foreign exchange market by compelling CBN to stop its current violation of the constitution with its capture of our dollar revenue.  This advice can only be disregarded with great peril to our welfare!

SAVE THE NAIRA, SAVE NIGERIANS!


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