National Issues
Nigeria’s New Fuel Pricing: Clarifying Critical Issues -By Ben Akabueze
Ben Akabueze
I have finally decided, at the risk of being labeled/abused, to weigh in on the discussion regarding the new framework for pricing petroleum products in the country. My sole purpose in this is to attempt to clarify the issues, especially for those whose minds are not already closed on the subject.
Most commentators have used ‘subsidy removal’ to describe the Federal Government of Nigeria’s decision. However, if you read the statement issued by the Honourable minister of state for Petroleum, you will not find ‘subsidy removal’ therein. The fact is that at the beginning of this year, the Federal Government announced that henceforth petroleum product pricing will be based on a ‘Price Modulation template’. That is why there was no fresh provision for Fuel Subsidy in the 2016 budget. The two key variables in this template are Crude Oil price and N/$ exchange rate. Earlier in the year, based on the crude price of $38pbl and N197/$, the template produced a price of N86 -N86.50/litre of PMS. It is this same template that has now produced a price of N135-145/litre. So what changed?
First, crude price increased from $38 to $46. Second, an autonomous market exchange rate of N285/$ was applied. The first reason is obvious but the second requires explanation.
It is no longer news that there has been a more than 60 percent crash in the price of crude oil, which accounts for over 90 percent of Nigeria’s foreign exchange (FX) earnings. We are, therefore, facing severe FX shortages, worsened by our failure to save during the boom years of Jonathan’s administration. For the records, with the lower average crude oil price during Obasanjo’s administration, Nigeria built up reserves/savings of over $60bn. Under Jonathan we ended up with about $30bn, despite higher average crude oil price.
The Central Bank of Nigeria (CBN) therefore resorted to rationing the limited FX. In government’s determination to keep the price of PMS low, about 40 percent of available FX was being allocated to fuel importation. This meant that manufacturers were crowded out of the CBN FX window. As a consequence, many factories have closed down and laid off their staff. Others have resorted to sourcing FX autonomously at higher rates, which they pass on through price increases on their products, thus fueling inflation.
The decision government has therefore made is to prioritise FX allocation to the real sector, thereby saving jobs and reducing prices of some basic goods. Note that the biggest fuel cost for manufacturers is diesel (since deregulated) for their generators. In other words, instead of having manufacturers source their dollars at about N285/$, let the fuel importers do so, especially since most of the PMS sold in the country was above N86.50 despite allocating 40 percent of our FX to fuel imports. This is the difficult trade-off government has had to make. Without doubt, the fuel price increase will cause hardship for many but hopefully some of that will be ameliorated by the effect of manufacturers getting more FX, with their staff getting back their jobs and lower product prices.
Now, about subsidy removal. The fuel subsidy regime in Nigeria has never made sense to me for the following reasons: (1) It was a subsidy on consumption. Wise nations subsidise production rather than consumption. In such countries, fuel efficiency is often the most important consideration in buying a car. But in Nigeria, because of cheap fuel, a guy would rather buy a 10 year-old fuel-guzzling ‘tokunbo’ SUV than a brand new KIA Soul for the same price! (2) The subsidy scheme was extremely fraud-prone. Trying to reform it was like attempting to reform Satan – an impossibility. It was therefore best to scrap it. That is why I supported the Jonathan government’s effort to do so in 2012. Probably some people opposed Jonathan’s subsidy removal for political reasons. However, the unprecedented subsidy scam of 2011, when we spent over N2 trillion (about 50 percent of the national budget) on fuel subsidy made some people so mad with the government that they were in no mood to reason with it.
Refining Crude Oil Locally
The Federal Government of Nigeria owns four refineries with a theoretical combined capacity to process 445,000 barrels of crude oil daily. Largely on account of corruption/incompetence, these refineries were so poorly maintained/managed in the past that it is now hard to get them working efficiently and consistently. However, even if these refineries were to operate at full capacity today (which is impossible), they can only produce about 40 percent of our current PMS requirement as they are designed to produce a blend of products.
The government’s attempt to privatise these refineries in the past were strongly opposed by Labour and Civil Society Organisations, and I can almost bet that unless we privatise these refineries, they will end up like NITEL/MTEL which became irrelevant in the telecoms industry with the entrance of private operators.
The current administration has devised a programme for the co-location of private refineries side-by-side the government owned ones. Such refineries can thus share facilities like crude and product pipelines, thus reducing their cost and time of establishment. The Federal Government of Nigeria has set a three-year deadline for attaining self-sufficiency and net-exporter status in refined petroleum products.
Also, the government has licensed, and remains willing to license more, private refineries. However, only the Dangote Group has made tangible progress in building a refinery. The other licensees have been unable to finance their refineries because banks were unwilling to finance a business that is not viable unless government pays a subsidy. The new pricing model should actually encourage more investment in private refineries, thus creating jobs locally.
Towards a Fully Deregulated Petroleum Sector
I am amazed that some people consider petrol the most critical commodity in this country. The three most consumed petroleum products in Nigeria are diesel, kerosene and petrol. Diesel and kerosene have since been deregulated, which means there is no subsidy on those two products. Yet, I would argue that diesel and kerosene are even more deserving of subsidy than petrol.
Due to the state of the electricity sector, most productive enterprises that employ large numbers of people use diesel-powered generators. Most mass transit vehicles (not ‘danfo’ which is really not a mass transit vehicle) and large trucks use diesel. Kerosene is the principal fuel for cooking among the poor. Before the recent increase in price of petrol, diesel was substantially more expensive than petrol. I don’t know any other country where petrol is cheaper than diesel. Today no one asks importers of diesel and kerosene how they source their FX but people are arguing that government has a duty to provide FX to petrol importers, even at the expense of manufacturers of basic consumer goods and keeping our people in employment. How did we acquire such fixation with petrol price?
The truth is that there is a vocal minority living in some urban areas, who are hooked on subsidised petrol for their fuel-inefficient cars. Several surveys have shown that over 80 percent of Nigerians pay much more than the subsidised price for petrol. Subsidy on petrol benefits the middle class far more than the poor, and so is a wrong application of subsidy.
As the Vice President said in his widely publicised statement, FX shortage is the principal cause of the petrol price increase. If we could provide all the FX required by importers, the price of petrol would only have needed to go up (or be subsidised) by about N13 to reflect the increase in crude oil price.
Nobody in government wants to see the naira weakening. CBN was able to defend the N/$ rate in 2008-2012 because we had the FX reserves then, but now we don’t. The reserves are down to $27bn due largely to CBN’s current efforts to defend the exchange rate of N197. The N285/$ rate is not exactly ‘black market’, which was at N320/$. Going forward, it is expected that crude oil price will rise. This means we will earn more FX, and the naira will strengthen, not weaken further. This means there will be some counterbalancing in the pricing template.
Ben Akabueze is Special Adviser to the Nigerian president on National Planning.
