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The new fuel pricing regime: Matters arising

By Emeka Anaeto, Economy Editor
THE federal government had announced a new fuel pricing regime which had sent the pump price to an all time high of N145 per litre, and in some places far above that. This development was a culmination of the various economic crises that had attended the present government since inception.

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 Global Economic Prospect, June 2015 edition of the World Bank titled, “The Global Economy in Transition” indicated that despite some pickup in economic growth rate across the world in the first quarter 2015, lower oil price is having an increasingly pronounced impact, albeit, negative, on oil-exporting countries like Nigeria, with lower prices sharply reducing economic activity and increasing fiscal, exchange rate, and inflationary pressures.

By the time President Mohammadu Buhari was one month in office oil price had a brief recovering from about USD53/ barrel as at May to about USD63, a development which had given a semblance of hope, but only to begin an uninterrupted drop down to less than USD30 in March 2016 before rebounding to USD45 as at this week.

Coupled with this was a less than targeted oil production at about 1.8 million barrels per day, (mbpd), achieved as at June last year, which has now dropped further to about 1.67mbpd as at this week.

With an oil-dependent economy, the impact of this development on government finances was obvious and it spilled over to all other economic facets such as external reserves, real exchange rate, inflation, gross domestic products and general wellbeing of Nigerians.

As at the time Buhari assumed duty inflation rate had spiked to the upper bound of the CBN target of 9% in May 2015, up from 8.7% previous month. By March this year inflation had galloped up to 12.7%. The demand pressure in the foreign exchange market persisted since Buhari assumed office culminating in an unprecedented depreciation in the Naira value in the parallel market despite all the CBN efforts at administrative controls. As at this week it was N323/ USD1 as against N220/ USD1 as at May 2015.

What we are faced in this current pricing regime is beyond removal of subsidy. For instance, what is the policy thrust of the new pricing? Is it fixed or market determined? Are we now on deregulated or partial deregulated downstream petroleum economy? What are the basis of or how did the authorities arrive at the new price? And so many more questions. First, by announcing a price whether with a band or a ceiling or both, the government has sent a signal that it is not yet deregulated, that we are still in the old government’s controls. If so what have we achieved beyond just increasing the pump price, the same measure that has been taken more than 25 times since 1972 and it never worked?

The Minister of State for Petroleum, Dr. Ibe Kachikwu, who had said that he would prefer liberalization to deregulation, ended up confusing everybody as to what is the difference. But the point he has made obviously is that we are still not yet in a deregulated environment. This brings to question of how they arrived at the new price. Kachikwu did not release any information on this except the pricing template of the government that had showed that actual landing cost of fuel along with marketers’ margin, would put the price at between N100 and N105 as at last week. How come the price announced had gone up to N145?

By citing the exchange rate based pricing the ministry had made the circumstances more intriguing, more so as they are saying the price should actually be N247 with the current foreign exchange costing. Which exchange rate? The official rate of N198/USD or parallel market rate of N323/ USD? The policy change could be more transparent.

Finally, and probably the most important aspect of the new petroleum marketing environment, Kachikwu announced that private sector operators are now to import the product. This is most important because the acute shortages the economy had experienced, the worse so far in Nigeria’s history, was as a result of abandonment of imports to Nigerian National Petroleum Corporation, NNPC, as private oil marketers have been apprehensive over the policies of the present regime on private sector market-led economy, indicated in price controls in the petroleum industry as is also the case in the foreign exchange market.

But more confusion appears to have also trailed this as it came with upper limit price fixing. One wonders what happens if the importer’s cost is higher than the stipulated limit. In such circumstance, would the government expect the importer to sell at a loss or would the government pay for the difference, a clear case of subsidy?

Related to this is the uniformity or otherwise of pump prices across the country. Obviously, common sense tells that the price cannot be same across Lagos State let alone across Nigeria given the additional transportation cost.

Transportation cost differential

Would the federal government continue to operate the Petroleum Equalization Fund, the bridging cost under which it pays for the transportation cost differential to ensure uniform prices across the country?

With all these questions and more many analysts are looking at possible hidden agenda behind the new pump price as just a way of raising money for the cash-starved government. But there are other better policy options for this agenda rather than the complications this new regime would bring. One would have expected a full deregulation of the downstream and midstream sectors that would guarantee efficiency in the sector, while shielding the government from the huge bureaucracy requirements and corruption piles associated with running a regulated market system.

Moreover, a deregulated system would save the government the scarce resources associated with bridging costs and foreign reserves. The fear of higher price in a fully deregulated system appears diversionary and deceptive. Already the economy and the citizens have burn the full brunt if not more beyond what would have been the real market price of a fully deregulated pump price. That the fuel marketers gladly agreed to import with their own foreign exchange and sell at the new price gives the indication that the new price has covered all costs including a healthy profit margin.

It is important to note here that many of the criticisms trailing the new price regime came more as a reaction to the way and manner it was presented. Three critical issues come up in this regard: Timing, integrity and hope. Many people would be perturbed that at a time like now when most Nigerians are gnashing under severe economic hardship, the government could have been more sensitive, especially when Buhari had recently and repeatedly acknowledged the sufferings while pledging to soften it. What the people are getting from the new pricing regime is insensitivity on the part of the government.

Secondly, many observers are quick to point out that Kachikwu has not been forthright in determining the direction of the sector especially since the prolonged fuel crises. Almost all promises and deadlines he had given on these issues have failed to materialize except the pump price increase which he did not promise. The people are questioning the integrity in the public accountability oath.

Finally, should we trust Kachikwu when he said the price will come down in six months of operation of this new market regime? How long shall Nigerians be patient before they see the positive change they voted for one year ago?

 

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