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By Henry Boyo
“… if we do not deregulate, it is not cost-effective for those who are producing PMS (petrol) to sell. At the same time, if you deregulate completely, prices of everything will go up. “So there are those complications, meaning we got to moderate all those things. Government has to come into a certain extent and this is what is currently going on, to try and balance things up; Because we cannot have just overnight, another massive deregulation. If you do that, the consequences will be very dire for the economy.”
“Government cannot just go and be setting up refineries. If government sets up refineries and uses its people to run it, it won’t work; … If you look at the refineries we have today, Warri, Port Harcourt and Kaduna, the primary reason they are not working today is that they are government-run.”
“Government cannot do business. Government business is to create the enabling environment for business. Government should not be in the business of setting up refineries all over the place. That is just a waste of time and resources.” (Ag. President, Yemi Osinbajo).
“… Until you deal with that issue (deregulation), you are going to be struggling with some of these concepts but I am just proceeding with them with the expectation that, as we get closer to it and get out of the emergency two-year period when importation will be taken out, that the need to look at that sector will become critical.” Dr. Ibe Kachikwu, Petroleum Resources Minister.
The preceding narratives of the Acting President and the Petroleum Resources Minister, clearly suggest that, despite the serious drawback and distortions created by the significant serial leakages, opened up by a centrally controlled petrol pricing model, the NNPC’s almost total monopoly of fuel imports may not end anytime soon.
Regrettably, the present regulated price model implies that each litre of petrol will continue to be sold for less than the actual open market price. Consequently, the value of total subsidy on petrol sold has often exceeded 20% of federal budgets annually, while, inexplicably, the consolidated allocations for critical social sectors such as Education, Health and Transportation, often, fall below N1tn annually.
Incidentally, although, the enacted 2017 Fiscal plan, made no provision for fuel subsidy, the reality is that with diesel selling at a Deregulated price between N170-175/litre, it is inevitable that about 20% subsidy is actually embedded in the current petrol price of N145/litre.
Nonetheless, the Petroleum Minister is yet to confirm if the expected savings from the celebrated ‘price modulation strategy’ he developed in May 2016, fully accounts for the present huge subsidy component in the current petrol price. However, it is certainly more likely that the savings, if any, from price modulation, would have been wiped out by the crash in the Naira price against the dollar, which serves as the international currency on which fuel price is predicated.
Instructively, while it may have been possible to sell petrol competitively and profitably at the open market, without subsidy, when Naira exchanged for N195=$, it would conversely, be absolutely impossible for petrol to presently sell at N145 without substantial subsidy; however, since no provision was made for subsidy in the 2017 Budget, it is not yet clear how government intends to settle the unfolding price differentials.
Evidently, if the private sector fuel importers continue to be severely constrained by the serious challenge of availability when purchasing forex to fund imports, while they also remain crippled by the alleged almost N1tn outstanding subsidy refund, which government still owes them, it would be unavoidable that the extent of NNPC’s ‘forced’ monopoly of fuel importation will continuously exceed 80% of total PMS imports. It is not clear, how NNPC presently accounts for the gaping financial hole it continues to dig when it sells over 30million litres of petrol, daily, below the actual market price. Some observers have suggested that NNPC’s reported trading loss of about N197bn in 2016, (see THISDAY Newspaper of February 17, 2017) may infact be closely related to the compelled misadventure of the Corporation in the fuel supply business.
Ironically, our ECOWAS neighbouring states have also become major beneficiaries of the cheaper fuel, openly smuggled across our borders, to subsidise transportation cost and other economic activities in these countries; consequently, it is speculated that the ECOWAS region may indirectly account for well over 20% of Nigeria’s alleged 30-40million litres daily consumption of petrol; regrettably, the thankless subsidy and hundreds of billions of Naira in revenue leakages to our ECOWAS brother nations will persist, for as long as petrol price remains regulated in Nigeria.
Furthermore, Ag. President Yemi Osinbajo also appears to be under the illusion that if there is more private sector participation in the local refinery of crude oil, petrol price will eventually become competitively market determined without subsidy. However, Government’s expectation for the early adoption of DEregulated pricing appears founded on the commissioning of the over 500,000 barrels/day refinery capacity of the Dangote Lekki Mega Plant, between 2018-19; additionally, the renewed government vigour to license and support several private modular refineries, particularly in the Niger Delta, is also expected to increase total production capacity; nonetheless, the hope that higher domestic output will induce lower prices is probably misplaced. Indeed, Aliko Dangote, has never hidden the fact that the ex-refinery gate price of petrol from his investment, will be based on the open market price, denominated in dollars. Dangote’s demand for a dollar denominated price is obviously due to the necessity to service the loans acquired for the gigantic project also in dollars. Admittedly, it would be undeniably, extremely risky, for Dangote to rely on the vagaries of CBN’s auctions of rations of dollars to settle his foreign loan obligations whenever due.
Furthermore, output from the modular refineries concept will similarly be smuggled to neigbouring countries, if local petrol price is based on a subsidized dollar rate, as is currently the case, where a special rate of N306=$1 is reportedly adopted for non-NNPC fuel imports. Ultimately, the illegal cross-border fuel rip-off will invariably thrive and flourish as the disparity between open market and subsidized fuel or dollar price increases.
Although, increases in the prices of crude oil are often blamed for higher fuel prices, ironically however, fuel price will evidently also rise even when crude oil price falls; for example, domestic fuel price was below N100/litre when crude oil price trended over $100/barrel. Conversely, the present regulated fuel price remains as high as N145/litre even when crude price has fallen below $50/barrel! In conclusion, therefore, deregulation will remain a challenge, unless the Naira exchange rate becomes stronger.