23

Mar

IS DEREGULATION ON HOLD FOREVER? 26062017

2017-06-26

IS DEREGULATION ON HOLD FOREVER?
BY HENRY BOYO

“… If we do not deregulate, it is not cost-effective for those who are producing PMS (petrol) to sell. Likewise, if you deregulate completely, prices of everything will go up. So there are those complications, meaning we’re got to moderate all those things. Government has to come in, to 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, who was speaking at the 2017 African Modular Refinery Discussion, in Abuja, on 7th June.)

“… 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, speaking to journalists recently at the 2017 Offshore Technology Conference (OTC) in Houston, Texas.)


The preceding narratives of the Acting President and the Minister, clearly suggest that, despite the serious economic drawback, distortions and escalated rent seeking created by serial leakages, which arise from price regulation, the NNPC’s, almost total present monopoly of fuel imports may not end soon.

Regrettably, the prevailing, regulated price model implies that each litre of petrol will be sold for less than the actual open market price. Consequently, the value of total subsidy on petrol sold annually, has often exceeded a quarter of federal budgets, when, inexplicably, the consolidated allocations for critical sectors like Education, Health, Water and Transportation, are below N1tn annually. 

Incidentally, although, the enacted 2017 Fiscal plan, made no provision for fuel subsidy, the reality is that with diesel selling at DEregulated prices between N250-175/litre, this year, it is inevitable that about a quarter of the current petrol price of N145/litre will be absolved as subsidy for which importers will subsequently claim a refund.

Nonetheless, the Petroleum Minister is yet to confirm if the expected savings from the celebrated ‘price modulation strategy’ he developed in May 2016, has fully accounted for the obviously huge subsidy component in the current regulated petrol price. However, it is probably more likely that such savings, if any, from price modulation, must have been wiped out by the savage slash in the Naira price against the dollar, the international currency adopted for pricing in the oil business.

It is revealing, that 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 still sell at N145 without substantial subsidy, with the crash in Naira rate to N306=$1; however, since the 2017 Budget did not provide for subsidy, it is not yet clear how government intends to settle the unfolding price differentials, without further increasing the already oppressive fiscal deficit which is before now in excess of 30percent of 2017 budget. 

Furthermore, if private sector fuel importers continue to be severely constrained by the limited access to the forex required to fund fuel imports, especially, when they are also financially handicapped by the high cost of borrowing and N1tn or so alleged subsidy refund, which government still owes these “hapless” importers, NNPC’s ‘forced’ monopoly of fuel importation and supply will inevitably increase to exceed 80percent 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, at near or indeed below the actual cost. Some observers have suggested that NNPC’s reported trading loss of about N197bn in 2016, (see THISDAY Newspaper 17/o6/2017) 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 Nigeria’s relatively cheaper fuel, stocks of which are ‘openly’ smuggled across our borders, to subsidise transportation cost and other economic activities in other countries. It is infact speculated that the ECOWAS region may indirectly account for over 20percent of Nigeria’s alleged 30-40million litres daily consumption of petrol; regrettably, the thankless subsidy and hundreds of billions of dollars in revenue leakages, from Nigeria’s Treasury to our ECOWAS brother nations, will persist, for as long as petrol price remains regulated in Nigeria. The question is, how long more will deregulation and its odious social and economic burden last?

Nonetheless, Ag. President Yemi Osinbajo appears to be under the illusion that, increasing private sector participation in the local refinery of crude oil, will make petrol readily available and that price will become competitively market determined without subsidy. It would seem that Government’s expectation for the early adoption of DEregulated pricing appears founded on the expected commissioning, in 2019, of Dangote’s over 500,000 barrels/day refinery capacity in the Lekki Free Trade Zone; additionally, government’s seeming renewed vigour to license and support 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 definitely misplaced. Indeed, Aliko Dangote, has never hidden the fact that the ex gate price of petrol from his refineries, will be based on open market prices, 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 financially risky, for anyone to rely on the vagaries of CBN’s weekly auctions of rations of dollars to settle their related foreign loan obligations whenever due. 

Notwithstanding, increased output from the modular refineries concept and the Petroleum Minister’s programme for co-location of new private refineries with the existing public refineries, petrol will still be massively smuggled to neighboring countries, if the local 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, while other equally vital economic sectors, including manufacturers and the vulnerable SMEs pay N360=$1. Consequently, the illegal cross-border fuel rip-off will invariably flourish if there is a widening disparity between the open market determined price and a fuel price which includes a direct price subsidy or a subsidy on the dollar price for all fuel imports. 

Although, rising crude oil prices 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 well over $100/barrel. Conversely, the present regulated fuel price has remained as high as N145/litre even when crude price has crashed below $50/barrel! In conclusion, therefore, deregulation will remain a challenge, unless the Naira exchange rate becomes stronger; instructively, however, the Naira rate will never become significantly stronger, so long as persistently excess Naira supply chase the rations of dollars that CBN regularly auctions in the market.

SAVE THE NAIRA,SAVE NIGERIANS!!