Nigeria has lost billions to subsidy payments. According to Nigeria Extractive Transparency Initiative, Nigeria has paid N4.5 Trillion on subsidies in the past 7 years, that is, N1.5 trillion shy of the current annual budget. That amount could have funded Dangote’s $14 billion refinery (N2.8 Trillion) poised to be the world’s largest refinery and still have a significant chunk of cash left. Not only were subsidies eroding the FOREX stash, the country was bedeviled with fuel shortages that constantly disrupted the smooth flow of businesses and living conditions. Oil marketers were unable to access foreign exchange to meet their approximate 50% portion of total national supply of PMS due to a shortage of FOREX. Nigeria has grappled with its foreign exchange instability due to drop in crude oil, which generates ~90% of export, as it maintains a dual exchange market with over 50% gap between the official market of N199/$ and the parallel market ~N320/$.
Fuel Subsidy finally gone?
It depends. First and foremost, the new regulation isn’t a deregulation. A deregulation means no controls – be it pricing or import controls. This is the conclusion of the meeting that had in attendance the Leadership of the Senate, House of Representatives, Governors Forum, and Labour Unions (NLC, TUC, NUPENG, and PENGASSAN).
- In order to increase and stabilise the supply of the product, any Nigerian entity is now free to import the product, subject to existing quality specifications and other guidelines issued by Regulatory Agencies.
- All Oil Marketers will be allowed to import PMS on the basis of FOREX procured from secondary sources, and accordingly PPPRA template will reflect this in the pricing of the product.
Pursuant to this, PPPRA announced a new price band effective 11/05/2016.
This isn’t a deregulation but rather a full price modulation; the marketers have a ceiling/maximum price of N145 per litre which they can sell at (price control). This calculation was made on assumption of crude oil prices and exchange rates at a certain price. What happens when crude begin to rally? Or the currency market experiences another shock? Will the subsidy then kick resurface or another price modulation effected?
Why the sudden increase?
Something interesting occurred. As at January 2016, when the oil price reached new lows – less than $30/barrel – PPPRA cost breakdown reflected the government was paying zero subsidy. Few months after, subsequent to a mild gain in oil price, it traded in the early $40s. Although foreign exchange arbitrage pricing persisted while Crude oil production dipped even further margining the gain effect that could have accrued to consumers. At least a fifth of Nigerian oil production, equivalent to almost 400,000 barrels a day, has been shut down as a pipeline closure added to disruptions caused by militant attacks. Which brings crude oil production to a 20 year low of 1.4 -1.7 mbpd compared to the budgeted production of 2.2 mbpd. This has put more pressure on the supply of FOREX as oil marketers and businesses struggle to source dollar on the official market.
The government seized the opportunity to bite the bullet with regards to subsidy, an evil they considered necessary.
In the space of 7 days the Expected Open Market Price surged from N99.38 to N135?
As the government demands that Oil marketers, who constitute a significant portion of FOREX demand, procure FOREX from other sources. The key cost component – Cost & Freight – has surged, currently at N109/$, even higher than the expected open market price as at 3rd of May.
If the exchange rate was more uniformed across the market and reflective of the value of the Naira; the oil marketers might have been able to source it at ~N250 as opposed to the exorbitant +/-N300 on the parallel market. This subsidized dollar is not sustainable
The consumer price index increased to 12.8 per cent in March compared to the 11.4 per cent in February. The National Bureau of Statistics said the rising inflation during the month was influenced by the growing fuel crisis and the scarcity of foreign exchange to support the economy. With scarcity comes price irregularity, in the latest estimate by the National Bureau of Statistic, Premium Motor Spirit (PMS) reveals that the average price of petrol paid by consumers rose by 36% to N135.69 in March 2016. Considering the 45% increase adjustment in the electricity tariffs nationwide that recently took place, the consumers are faced with yet another hike.
How do we stop importing fuel?
Kachukwu has stated plans to privatise the nation’s refineries within the next one year, disclosing that Agip and Chevron have already indicated interest in purchasing two of the refineries. This is not a full solution in itself as if the refineries in question performed to their optimum capacity, their production would still not meet local demand for petrol as at full capacity, all the refineries could supply 20 million litres of petrol on a daily basis. The statement “any Nigerian entity is now free to import the product” should stir innovation amongst players on how to solve the problem gradually. Options along the lines of small modular refineries that can be running in 1 year or buy existing refineries abroad, dismantle, relocate? Pending the arrival of Dangote’s private refinery in 2018.
The pump price of gasoline is N130/lt in the US (using parallel market exchange rate) and N81/lt (using parallel market rate of N320/$)while Nigeria just adjusted to N145/ltr.
If the foreign exchange was effectively managed, will the impact on fuel price be reduced? Will the benefit of increasing the price exceed the cost of it – consumer impact, inflation, purchasing power?
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