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Fuel price hike: Nigerian economy on the precipice

By Michael Eboh

Though stakeholders are divided over the impact of the fuel price hike on the Nigerian economy in the medium to long term, it is however, a general consensus that in the short term, the effect of the hike on the economy would be unpleasant and near disastrous. In the wake of the hike, the Federal Government and other stakeholders had stated that the new price would bring temporary hardship on Nigerians, stating that it is a bitter pill that everyone must swallow for the country to survive difficult times and move forward.

NEW FUEL PRICE—Minister of State, Petroleum, Dr. Ibe Kachikwu, briefing newsmen on the new fuel price, yesterday, in Abuja.
NEW FUEL PRICE—Minister of State, Petroleum, Dr. Ibe Kachikwu, briefing newsmen on the new fuel price, yesterday, in Abuja.

The action of the Federal Government, it was agreed, would bring about a hike in the price of essential commodities, including services; erode the value of the naira against major international currencies; distort the economic direction of the country and bring about increased hardship, among others.

Specifically, the policy had opened a wide vista for the devaluation of the naira, especially as the PPPRA had acknowledged a parallel market rate of about N290 to a dollar. It is expected that the price hike and the liberalization of fuel importation would further put pressure on the country’s foreign reserves, leading to a declining value of the naira and bringing about a sharp rise in the prices of goods and services.

With the liberalization of fuel importation and removal of subsidy, more companies will seek licenses to import the commodity and the demand for the dollar would rise significantly. Also, the absence of a workable transport infrastructure meant that Nigerians would spend more on transportation, while the cost of fuel and transportation would be added to the cost of goods.

Already, data released by the National Bureau of Statistics, NBS, a few days ago, had seen Nigeria’s inflation rate climb to a near six-year high of 13.7 per cent in April, 0.9 percentage point higher than the previous month’s level of 12.8 percent. The latest inflation report indicates worsening economic conditions in the country, where gross domestic product, GDP, growth was just 2.8 percent as at last quarter of 2015, its lowest rate since 1999, and speculation of a further decline in the first quarter and first half 2016 is rife.

Analysts are of the view that at the current inflation rate, the Central Bank of Nigeria, CBN, appeared to have been pushed to the wall once again on its benchmark interest rate, as the existing Monetary Policy Rate of 12 per cent is now grossly negative. It is expected that when the data for May is eventually released, inflation would have further spiked to as high as 14 or 15 per cent.

Minister of State for Petroleum Resources and Group Managing Director of the Nigerian National Petroleum Corporation, NNPC, Mr. Ibe Kachikwu, had confirmed that the policy would inflict pains on Nigerians, while he stated that the inherited difficulties of the past and the challenges of the current times imply that the government must take difficult decisions on these sorts of critical national issues.

To mitigate the impact of the hike on the Nigerians, Kachikwu disclosed that along with this decision, the federal government has in the 2016 budget made an unprecedented social protection provision to cushion the current challenges.

In their analysis of the fuel price hike, analysts at Afrinvest (West Africa) Limited, stated that in the short term, increase in PMS prices will pressure consumer spending as households re-prioritize consumption upon steep increase in electricity tariff, imported and locally produced consumer non-durables and now petrol prices. They noted that real income will also further experience a drag, as they estimate inflation rate to likely overshoot the 14.0 per cent mark in May.

Continuing, the analysts said, “The hike in fuel price will worsen prices, most especially in major cities like Lagos and Abuja, as transport and electricity, gas and other fuels which constitute 23.2 per cent of the Consumer Price Index, CPI, weighting pressure, in the May inflation report and beyond. Hence, increase in general price level will hurt real wage rate significantly.

“Accordingly, Labour Union will be justified to propose review of the minimum wage. Thus, Government will have to choose between readjusting pump prices downward or an upward review of minimum wage. On a balance of factors, an upward review of minimum wage will moderate the gains from subsidy savings but will ease consumption spending and have a much more long lasting impact on the economy.”

Also, the Nigerian Association for Energy Economics, NAEE, projected that the hike would bring about some macroeconomic instability in the short run as a result of this shock arising from the sudden but inevitable rise in the price of PMS under the circumstances.

NAEE also stated that it understands the concerns and fears of the masses on the impact of the rise in petroleum product price and subsidy removal on the cost of living in the country, explaining that these concerns can be attributed to the failure of past administration in the area of transparency and accountability.

It, however, added that in the  long run, the gains would add significant value to the economy in terms of trillions of naira to build the national economy for infrastructure, capacity building and development. Continuing, it said, “There are a number of necessary conditions that government must put in place as soon we get out of the current economic hardship to ensure that the full deregulation of the sector succeeds and the downstream sector regains its ‘lost glory’. Among these conditions are the following:

“First, guidelines to support open access of common infrastructure in the sector including farm tanks, storage and depot facilities to enable marginal players to be able to participate in the market without serious ~advantages. The owners of the infrastructure must not discriminate among potential users after clearly established conditions have been met.

“Second, the government must provide necessary support for those who want to establish local refineries. The key to Nigerians enjoying the benefit of the ownership of huge petroleum endowment is when local refineries are up and running. We advocate for a clearly defined fiscal and other forms of provisions for locally established private refineries that are efficient and cut some of the associated costs with imported refined products.

“Third, the competition law must be passed to ensure that firms with significant market power do not collude to influence market prices. The exercise of market power, without vigorous oversight is not consistent with an efficient market system. The government must ensure that all forms of collusion to influence market outcomes are promptly dealt with.

“Finally, government must be resolute in ensuring that it pushes through the deregulation, whatever the opposition that is expected. Other white products, including diesel and kerosene, have been deregulated without major negative economic impact; studies have also shown that the inflationary impact of deregulation of petroleum product prices is also limited.”

However, NAEE was of the opinion that as the government pushes on with petroleum products market deregulation, it is imperative for it to also put in place measures to support the vulnerable groups of the society.

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