22 January 2018

Nigeria: Is CBN the Evil Genius Behind Higher Fuel Prices?

Photo: Premium Times
Fuel scarcity.

The acute scarcity of petrol nationwide may have receded significantly, but issues relating to steady supply, appropriate pricing and fuel subsidy, obviously still remain very contentious. Government and NNPC have invariably blamed private marketers for the fuel shortage, while marketers have conversely, demanded the immediate payment of over N720bn that NNPC owes them.

The debt also includes government's compensation to marketers for trucking fuel, from the ports, to all nooks and crannies, so that fuel can sell at government's regulated price of N145/litre nationwide. The significant degree of fraud inherent in this arrangement has become a regular menu for professional rent seekers; for example, petrol cargoes officially registered for delivery in faraway Kaura Namoda, could still be sold ex-depot in Lagos, while fake waybills will be presented, processed and approved for payment by NNPC.

Arguably, the 'beneficiary cabal' of this scam will aggressively oppose any attempt to abolish the petrol bridging fund, and this may explain government's apparent lack of enthusiasm and foot-dragging to build an efficient rail delivery system which would facilitate cheaper fuel transportation and will certainly also, be less abrasive to our already challenged road network. Evidently, deregulation is bad business for treasury looters.

Nonetheless, with the marketers' abstention from fuel imports, NNPC's forced imports of 100% of Nigeria's motor spirit requirements, according to Ibe Kachikwu, regrettably induces a "daily loss of between N800m-N900m" to the Corporation.

However, last week, the Senate rejected a report on fuel import values and subsidy presented by the Committee for Petroleum Resources, led by Senator Marafa, APC-Zamfara Central. Senate President, Bukola Saraki noted with apparent concern in his address, that "if we are consuming 27 million litres of petrol daily, while the NNPC brings in 40 million litres," according to the report, "what about the difference?" "It is criminal!"

Indeed, Marafa's Committee was mandated to investigate the allegation that "a surplus of 5.9 billion litres of petrol (i.e. about N900m daily) could not be accounted for in 2017."

Notably, however, Senator Marafa had reportedly, inexplicably, deliberately barred the Minister of State, and other NNPC Directors from answering any question on the allegation of illegal subsidy payments during his Committee's formal hearing.

Consequently, Senator Nafada Bayero, APC-Gombe State, ironically observed that "this looks like a report of the NNPC"... according to Bayero "it looks like a report that was imported into the Senate," and the Senator therefore advised that "the Senate's Petroleum Resources Committee should go back and bring its own report."

However, despite the seemingly patriotic grand standing and braggadocio, of the Senators, sadly the cultist loyalty of espirit de corp, may ultimately prevail and these matters of urgent public importance could fade away as usual without consequences.

Unfortunately, the problems of subsidy, scarcity and higher petrol prices, have subsisted for decades, and yet, we are clearly no nearer a solution to this clearly oppressive and suicidal game-plan for supplying Nigeria's petrol needs.

Invariably, if government cannot access the huge investment, employment and revenue potentials and opportunities, in a fully deregulated market space, then, further increase in petrol price, well beyond N200/litre will be inevitable and increasing subsidy values in excess of N1tn ($3bn) annually, will be flushed down the drain while scarcity and the related social pain and angst will endure.

Expectedly, in a regime of fixed prices, higher crude oil prices should technically instigate higher fuel prices to invariably induce rising subsidy values, that will compound Nigeria's steep climbing fiscal deficit, despite our already crushing debt burden.

Conversely, however, if petrol price remains fixed at N145/litre, lower crude oil prices and output would ultimately reduce our forex reserves and imports cover and also weaken the Naira exchange rate. Invariably, weaker Naira rates will instigate higher fuel prices which will sustain the demand for increasing price subsidy.

Sadly, the above scenario depicts the ultimate national dilemma of regulated pricing and subsidy in the fuel business.

Instructively, higher subsidy values will not attract investment in new refineries to ever replace fuel imports. Ultimately, intermittent scarcity and rising public angst caused by NNPC's inadequate capacity to solely fund and deliver Nigeria's petrol requirements will become inevitable.

Indeed, the underlying objective in the preceding 4 titles published in this column in recent weeks, was to explain why a deliberately misaligned Naira exchange rate is actually the real spoiler in the business of petrol supply, price deregulation and subsidy. (See www.lesleba.com). It is certainly inexplicable and possibly fraudulent that the Naira rate remains static even when forex reserves are extremely bountiful.

Clearly, unless the Naira exchange rate is appropriately realigned, the debacle in fuel pricing, scarcity and the increasingly oppressive subsidy values will remain inevitable and invariably distort best practice resource allocation and deepen poverty nationwide.

It is a reasonable expectation, in any disciplined economy, for exchange rate to fluctuate in unison with higher or lower forex reserves overtime, but the problem arises when, for example, the Naira rate remains relatively static, despite aggressive crude oil output, well in excess of 2 million barrels, and a significant 50% rise in crude oil price from below $40/barrel for most of 2017 to beyond $60/barrel.

Conversely, if foreign reserves are boosted by rising crude prices and output, and if this good fortune, expectedly, translates to a stronger Naira, the price of petrol will either remain stable or actually fall in proportion to the increasing level of foreign exchange accretion, from the stronger Naira exchange that evolves. In such event, higher crude prices will become a blessing and even restrain or reduce petrol price.

However, Nigerians have hardly enjoyed the benefits of a stronger Naira for decades. The reason for this anomaly is traceable to CBN's style of fixing the Naira exchange rate by first capturing the export dollar revenue and then increasing domestic money supply by fraudulently substituting Naira allocation for export dollar revenue, before proceeding thereafter, to auction small rations of dollars from "Nigeria's fortuitously bounteous dollar reserves" in a market that the same CBN unashamedly decries to be overwhelmed with too much Naira!!

Ultimately, in such a market space, dollars will be sold to buyers who offer to pay more Naira for each dollar. Instructively, with such a price model, no matter how high our reserves become, the Naira rate will always weaken and precipitate higher fuel prices which will induce public demand for subsidised fuel. Evidently, our monetary history in the last three decades or so corroborates this observation.

Consequently, unless CBN reviews the market paradigm for determining Naira exchange rate, it would remain an uphill task to deregulate the downstream sector of the Petroleum industry.

Save the Naira, Save Nigerians!!!

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