By Henry Boyo
Nigeria’s Petroleum marketers threatened, to commence mass retrenchment in their communiqué of 29th August, 2017, unless government settles over $2bn outstanding invoices, and also pays interest charges, on their delayed payments and the related exchange rate differentials, notwithstanding that such payments would compound the integrity of the 2017 N7.4tn budget, which already contains a crippling N2.32tn or 30 percent deficit.
Evidently, confusion trails government’s flip flops and failed attempts to remove subsidy and deregulate petrol pricing. However, the outstanding $2bn debt owed marketers may alarmingly, technically rise beyond $4bn (N1.4tn) before 31st December 2017, if petrol price remains at N145/litre; in such event, fuel subsidy may ultimately, voraciously consume about 20 percent of 2017 budget! Furthermore, in a report in Punch edition of 24/8/17, the Fiscal Responsibility Commission (FRC) confirmed that Government illegally withdrew over N359bn from the Excess Crude Account to fund subsidy in 2015. Nonetheless, the FRC is yet to report how much subsidy NNPC unilaterally funded between 2016-17, without prior Legislative approval.
Ordinarily, the present fortuitous rise in crude oil price beyond $40/barrel, should be a welcome development for enriching CBN’s depleted dollar reserves; conversely however, if crude price remains beyond $50/barrel while Naira exchange rate stagnates, the subsidy burden will become escalated if petrol price remains at N145/litre. The present severe social anguish triggered nationwide by acute petrol scarcity and hyper black market prices is invariably the product of the mismatch between rising crude prices and inexplicably weaker Naira.
The above title ‘Is Petrol Still Subsidized’ was first published on 31st October 2016; the following is a summary; sadly, the question posed still remains officially unanswered: please read on:
“The Minister of State for Petroleum resources, Dr. Ibe Kachikwu, informed newsmen in Abuja, on 17 December, 2015, that Government would focus on price modulation to ensure efficiency and regular supply of petroleum products; price modulation, according to Kachikwu, “has nothing to do with the removal or existence of subsidy.”
The Minister also explained that petrol price would no longer be fixed, as crude price would henceforth determine the market price for petrol. Kachikwu also noted that a band between the earlier discounted price of N87 and the subsisting N97/litre might be adopted. Evidently, the Minister at this stage, probably did not fully recognize Naira exchange rate, rather than higher crude price as the critical factor in petrol price.
However, on 11th May 2016, after 5 months of severe social anguish induced by acute fuel shortage, Vice President, Yemi Osibanjo, set a new pump price of N145/litre, and expressed optimism that the new price would improve supply, and stimulate competition and eventually drive down pump price. The new price, according to Kachikwu, was predicated on a projected exchange rate of about N280=$1; however, barely 2weeks after CBN announced its flexible exchange rate regime, the Naira/Dollar rate rose above N300/$, while crude oil price unexpectedly stabilized around $40/barrel; consequently, profit margins were eroded, and the new price became unprofitable for third-party importers. Invariably, the over N150/$ gap between official and parallel exchange rates, ultimately spiked the official Naira exchange rate well beyond N300=$1 to make N145/litre price unworkable.
Curiously, in a seemingly unsolicited intervention, nine former NNPC GMDs, expressed their fears, in an NNPC press release on 4th September 2016, after a meeting with the Petroleum Minister that N145/litre price was “not congruent with the downstream liberalization policy, especially when foreign exchange and other price determining components, such as crude oil cost and NPA charges remain uncapped”. Indeed, prior to the Ex-GMDs’ reaction, petrol marketers had similarly suggested, according to a Punch Newspaper report of 07/08/2016, that “if all pricing components are adequately captured, the actual or real cost of petrol was N151.87”.
Furthermore, Mr. Mele Kyari, the NNPC GMD, Crude Oil marketing, also stated on 24th October 2016, at an oil Expo in Lagos, that “it is impossible today to import and sell the product at the current fixed exchange rate”. Consequently, Kyari warned that “the burden would become too heavy if NNPC remains the sole importer of petrol”.
However, in his attempt to douse public anxiety, NNPC Director, Public Affairs, Garba Deen Muhammed, quickly, assured Nigerians, at another press briefing, two days later, that the price of N145/litre has not changed. Muhammed confidently asserted that there can be no petrol shortage with the reported, subsisting supply glut and very robust stock and long term procurement contracts that NNPC has established with suppliers. When asked if NNPC was still subsidizing fuel, the GMD emphatically countered, “No, there is no subsidy”, but boasted however, that “the current availability of PMS was a result of the “diligent application of commonsense with price modulation,” and therefore confirmed, that “petrol prices were now being determined by market forces.”
So, the dilemma is that, with the conflicting reports from the NNPC ‘family’ who then, do we believe on the issues of sustainable petrol price, supply and subsidy?
Nevertheless, if NNPC is compelled to remain sole importer, as suggested by Mele Kyari, and if petrol sells below its cost price, then of course, it is inevitable that the corporation’s financial accounts will ultimately look very tattered and ugly. Incidentally, Newspaper publications on forex usage have never indicated NNPC as sourcing forex from commercial banks for its petrol imports. The critical question therefore is, with the adoption of the Single Treasury Account for all government revenue, how does NNPC source forex and what Naira exchange rate, applies when NNPC unilaterally seizes in-house dollar receipts to pay for its substantial petrol imports? Besides, why has the National Assembly remained silent, as in previous years, on what is clearly a violation of the appropriation bill?
Furthermore, how much subsidy is NNPC presently yielding on each dollar allocated for its petrol imports to ‘artificially’ sustain the present N145/litre price; indeed, how much of this subsidy is reflected as, public expenditure, without the required legislative approval, since provision for subsidy is conspicuously absent in 2016 and 2017 budgets.
Conversely also, if subsidy is actually eliminated with NNPC’s price modulation strategy, as suggested by GarbaDeen Mohammed, then we should properly celebrate the Corporation’s ingenuity in hatching this enabling solution to the hydra headed fuel pricing issue.”!
The above piece will be concluded with the following excerpt from another article titled “Fuel Price, The Bone In NNPC’s Throat” published in Punch and Vanguard editions of 25/07/16. (See www.lesleba.com).
The deregulation of the petrol market will remain inchoate with severe market distortions, if price and applicable naira exchange rate for fuel imports remain centrally regulated. Evidently, unless the price cap for petrol is lifted, petrol marketers will refrain from direct import, and the NNPC may once again become sole importer to avert scarcity, even when this business is clearly an unsustainable loss.
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 N800bn annually from 40m litres daily consumption) can be recovered as petrol tax in place of about N1.5tn subsidy payments, if price remains unchanged at N145/litre.
“Worse still, in place of relief, if crude oil price fortuitously rises beyond $50/barrel and happily increases Government revenue, Nigerians will, ironically, become apprehensive that such increase will ‘unfortunately’ instigate much higher petrol prices and sustain subsidy big time, particularly, if price remains N145/litre, or if the Naira exchange rate further depreciates.
“Notably, however, a plausible resolution to the inflationary and oppressive supply consequences of rising fuel prices and the avoidance of oppressive subsidy values even when crude prices spiral, will in fact, be a stronger Naira exchange rate; a stronger rate will evolve if CBN is compelled to break its stranglehold monopoly on the forex market, and also ceases to auction the dollar against its own currency, the Naira.”
Merry Christmas!!
SAVE THE NAIRA! SAVE NIGERIANS!!