By Henry Boyo
The nagging question for any close observer of the market is whether or not diesel can sell above petrol and kerosene prices in a deregulated market space? If it cannot be so, how then does NNPC account for the present huge price differentials for both products, when diesel sells for over N200/litre? The following is a summary of an article published in May 2016, titled “Why Petrol will exceed N200/litre this year…unless”; nevertheless, with NNPC’s seeming helplessness and confusion with petrol and kerosene prices, “Fuel price: the bone in NNPC’s throat” seems a more appropriate title. Please read on:
“The Minister for Petroleum Resources, Ibe Kachikwu, recently, set petrol price at N145/litre; the NNPC GMD, was however, clearly cautious to avoid a definite declaration that the petroleum downstream sector has become fully deregulated with petrol price increase; however, NNPC’s seeming dictatorial price hike is clearly inconsistent with a deregulated market.
The Minister is certainly also aware that a cap on petrol and kerosene prices, will sustain rent seeking in the distribution chain and make subsidy inevitable. Although, Kachikwu indicated that importers will source forex at about N280=$1, he did not explain how the parallel market rates will be restrained below this ceiling, particularly when fuel imports, which traditionally consume almost 40percent of CBN’s total forex supply, ultimately descend on a less liquid black market to source 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 remain 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, 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, and NNPC may once again become sole importer.
However, if Naira continues to depreciate, the retention of N145/litre petrol price, will inevitably bring back subsidy, and we may, once more require a supplementary Appropriation bill to fund unbudgeted petrol and kerosene subsidies this year; consequently, further profligate subsidy disbursement would inadvertently sadly return with a vengeance of about 100percent of the current N145/litre regulated price.
Worse still, if crude oil price rises 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 induce fuel subsidy if the N145/litre price cap remains. Consequently, if crude prices further rebound, petrol price must be hiked beyond N145/litre to avoid any subsidy.
Indeed, in several African markets, where deregulation exists, average pump price is about $1/litre, irrespective of whether these countries export crude oil. Consequently, an extrapolation of this price range would suggest that deregulated pump price will be closer to subsisting Naira exchange rate. Thus, if Nigerian importers access dollars at N280, they would in turn, probably sell petrol for between N240-N300/litre. Consequently, weaker Naira exchange rates will inevitably trigger higher petrol prices in a conventionally deregulated market.
Infact, if marketers bought dollars at N280=$1, it would be commercial suicide to sell their petrol stock for USD50cents or N145/litre, unless of course, subsidy is again re-introduced, with its warts and all, in a macabre one step forward, two steps backward movement. Furthermore, domestic pump prices below USD80cents may also encourage massive cross border smuggling of Nigeria’s relatively cheaper fuel.
Thus, the only plausible resolution to inflationary and oppressive fuel prices will infact be a stronger Naira exchange rate. For example, if fuel importers could purchase dollar with N100=$1, fuel pump price may not exceed N100/litre; consequently, up to N45/litre (about N2bn from 40m litres daily consumption) can be recovered as petrol tax, if petrol price remains at N145; evidently the additional N800bn annual revenue (over 12percent of 2016 budget) will certainly 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 would 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 CBN senselessly liberally funded outflows of $150,000.00 annually for personal spending abroad, with Naira denominated debit cards, when infact well over one hundred million Nigerians earn less than N1m ($5,000) annually.
Media reports of the gross abuse of CBN’s controversial dollar liberalization include the weekly funding of 3000 BDCs with $60k. Indeed, only an arch enemy of Nigeria could have come up with such a disingenuous way of emasculating our currency and destroying our economy and values. It is regrettable and inexplicable 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 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 anticipated from successful diversification of our economy, will unfortunately, realistically still take between 3-5years to materialize, that is, on condition that the enabling monetary indices of inflation and cost of funds below 3percent and 7percent respectively subsist. Inevitably, therefore, pressure on the exchange rate will persist for some time and higher and higher fuel prices in excess of N200/litre will invariably prevail to further drive inflation.
The Naira’s lowly fate will undoubtedly remain sealed and fuel prices will continue to spiral for as long as CBN continues to deliberately auction dollar rations for higher Naira bids, in a market that is, already undeniably awash with surplus Naira liquidity. Unfortunately, the excess Naira supply will invariably, also compulsively instigate CBN’s counter-productive high cost Excess Naira 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 CBN’s Naira deprecating 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.”
SAVE THE NAIRA! SAVE NIGERIANS!