Wobbling, fumbling with fuel prices By Henry Boyo

kachikwu

The PPPRA Executive Secretary, Farouk Ahmed reportedly announced, at a press briefing on December 29th 2015 in Abuja, that a revised template for fuel pricing had been approved by the Agency; the announcement was evidently the formal manifestation of the ‘modulated pricing’ model earlier canvassed by Ibe Kachikwu, the NNPC CEO and current Minister of State for Petroleum. Thus, with the application of the new template, petrol price will be reduced from N87 to N86 in NNPC filling stations, while other marketers would sell at a pump price of N86.50/litre.

Kachikwu’s statement probably suggests that fuel price has fallen below the existing subsidy threshold of N87/litre with the new pricing template; in this event, government responsibly decided to be honest enough to pass on between N1 and 50Kobo/litre discount on petrol prices to the public, despite the oppressive N2Tn projected loan required to fund 2016 budget deficit. Worse still, government’s borrowing requirement will certainly exceed the highest ever deficit of N2.2Tn, if oil prices continue to remain well below the $38/barrel budget benchmark.However, in contrast to the previous static cost template,fuel prices would henceforth be reviewed every quarter to reflect fluctuations in any cost variable. Indeed, Kachikwu had also corroborated the thrust of the new template when he emphasized in an earlier press briefing on that “we are not going to be fluctuating prices day to day, we are going to take like an average, and I think that today when you look at the prices, we have no subsidy, because prices remain low and that is what we need to do”.

According to the minister, the PPPRA’s modulated response to fuel pricing is a demonstration of government’s “honesty in being able to sell products to Nigerians at affordable prices that make sense”. Nonetheless, the Minister is certain that we still need to get out of the subsidy debacle, because, according to him “the reliability and affordability of subsidy are issues we need to get away from, whether or not you believe in subsidy”.

Instructively however, if unrestrained dollar demand in the parallel market continues to wag the official Naira exchange rate, the CBN may inevitably succumb and fatally commit to another significant Naira devaluation. However, an additional 25% Naira devaluation to bridge the wide gap between divergent Naira exchange rates would inevitably spike fuel price once again above N120/litre, irrespective of the application of the reviewed, presumed responsive PPPRA template. In this event, It would certainly be speculative to predict the nature of public response to the presumed honest reflection of cost variable by government, if fuel price again spirals unexpectedly, particularly, when crude prices conversely remain low.

Nevertheless, if Naira exchange rate depreciation persists, petrol prices will inevitably remain volatile and ultimately create severe tensions between the people and government. It is understandable that government would want to appear sensitive to the current impoverished state of Nigerians, however, a patriotic reformist administration should also be responsible enough to take some hard decisions to save the economy, even if government becomes temporarily unpopular as a result.

Thus, It is possible that if President Buhari increases fuel price from N87 to N100/litre, the treasury will swell by almost N800m everyday from the sale of the alledged 40m litres of petrol consumed daily. Indeed, if crude oil price further dips, about N365bn could be consolidated annually to reduce the clearly unwieldy N2Tn plus deficit in the 2016 Appropriation bill. Similarly, if kerosene is also readily available and sells for about N70/litre nationwide without subsidy (rather than over N120 black market price with scarcity and subsidy), it is possible that more than N100bn could also be realised to further reduce the huge loan provision in the 2016 budget.

Incidentally, the present Administration’s game plan on fuel pricing uncomfortably mirrors former President Jonathan’s reduction of fuel price from N97 to N87/litre, prior to the 2015 elections, despite a prevailing worrisome bulging deficit which needed to be funded with high interest rates which are clearly oppressive and out of tune with sovereign debts of resource endowed Nations like ours.

In retrospect, if Jonathan had patriotically and responsibly risked pre-election popularity to reduce pressure on the economy by retaining fuel price at N97/litre or possibly even raising it up marginally to N100/litre, with an irrevocable commitment to maintain adequate supply at all times, the N600bn (15% of 2015 budget) lately approved as supplementary budget on December 1st 2015, to clear outstanding fuel subsidy bills, may not have been necessary, and our crushing debt burden would have also become lighter. Besides, fuel scarcity and the attendant social agony would probably have also become minimised, as petrol marketers would be eager to import and enthusiastically supply fuel to meet demand while a subsidy free regime prevailed in the market.

Expectedly, however, the Treasury friendly price advantage induced by the slump in crude price was, soon after, wiped out with the subsequent 30% Naira devaluation which spiked fuel price to once more ‘force’ subsidy into the existing pricing template; sadly a similar Treasury friendly price advantage has again been made possible under Buhari, ironically, also by the increasingly low price of crude oil below budget benchmark; nevertheless, another significant naira devaluation would inevitably, similarly push fuel price back into the realm of subsidy and contention between the people and government.

This column has consistently explained that weaker Naira exchange rates instigate high fuel prices which provoke public demand for subsidy; inexplicably, however, public expectation was shattered when bountiful and exceptional dollar reserves failed to strengthen the Naira exchange rate and conversely reduce fuel price, a bizarre case of “tails you lose and Heads I win”. It is unfortunate that we should rely on reduction in crude prices to bring down fuel prices and remove subsidy, when clearly, our income expectations and opportunities to develop critical social infrastructure also become severely challenged when crude oil price falls.

Furthermore, Kachikwu had also suggested in his interaction with the press on that government refineries would soon achieve production output of up to 10 million litres daily; unfortunately, however, the Minister did not indicate if the price of the products locally refined would be anyway cheaper than the equivalent imports as per public expectation.

Indeed, According to Farouk Ahmed, under the new dispensation the NNPC will be responsible for over 78% of the total fuel supplies in 2016; nonetheless, in view of the persisting pressure on the Naira exchange rate, It would be revealing if NNPC has also strategically projected an amount for fuel subsidy in their 2016 budget; it would be equally of interest to know the National Assembly’s reaction to such provision.

VANGUARD

END

CLICK HERE TO SIGNUP FOR NEWS & ANALYSIS EMAIL NOTIFICATION

Be the first to comment

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.