The Minister for State for Petroleum Resources was on Channels TV Sunrise show on Thursday explaining the reason for the hike in petroleum prices which has taken a lot of Nigerians by surprise.
While responding to questions on how they arrived at the pump rice band of between N135 – N145 per liter, the minister confirmed that they had relied on a price of N285/$1 which suggest that the government now believes that should be the right price of the Naira.
“How did we come to the price of 145? It’s a simple conversion of using foreign exchange at N285. That N285 is from nowhere, it is basically the secondary source that people buy FX from versus the 320 which is black market.”
The government has been in denial for months insisting that the price of the dollar was between N197 – N200 insisting that the parallel market was much smaller than the interbank market where they believed the price was no more than N200. The CBN still had an exchange rate of N197 on its website as the official rate at the time of writing this article.
Back in January 2016, the CBN issued a press release that it was banishing the BDC’s from its official window confirming also that it was not going to be prioritizing the following imports
- Matured Letters of Credit from Commercial Bank
- Importation of Petroleum Products
- Importation of critical Raw Materials, Plants, and Equipment, and
- Payments for School Fees, BTA, PTA, and related expenses
With the import of petroleum products now firmly out of its demand for forex list, the CBN is now more than likely going to announce a devaluation around the price of N285 that Dr Kachikwu announced. This view is further strengthened by the recent admission by the Vice President Yemi Osinbajo that the government was ready to “re-evaluate” its exchange rate policy. Osinbajo further explained that “We expect very soon we will see a more flexible approach to the currency.”
What this means for you
With an imminent announcement of the devaluation of the Naira, people who still have dollars and are looking to sell now may well have a rethink and wait to see how the market reacts to it. One would expect the price to between the official and parallel market rate to narrow but this may only occur if the CBN is now willing to intervene much more at the interbank. Liquidity is all that is needed for the price of the dollar at the parallel market to come down. Some analysts believe this could happen with a devaluation as businesses who have dollars stashed abroad but are refusing to repatriate them at the official rate of N200 may now be willing to do so. Foreign investors who have for long-held back on investing in Nigeria may also now be willing to re-enter the country at a price of N285.
If devaluation does not create liquidity or drastically reduce the pent-up demand (currently put at about $5 billion) then it is likely that the parallel market rate will widen. The recent spate of militant attacks is also likely to further reduce the amount of dollar which the government can earn. Dr Kachikwu confirmed this when he said oil production had gone from 2.2 mbps to about 1.4 mbpd. This basically condemns the CBN has a part player in the forex market leaving importers to continue to rely on the parallel market.
Fuel importers are one of the major users of forex and as such sending them to the parallel market only adds to the demand that outside of the CBN’s reach. That demand is more than likely going to push up the price of the dollar at the black market.