Striking the right balance in fuel pricing -By Uche Uwaleke

Filed under: Forgotten Dairies,National Issues |

 

The acute fuel shortage experienced during the last festive season may have abated but the major issue remains: How best to address the challenge of appropriate fuel price that guarantees adequate supply without much damage to the economy. With the international crude oil price likely to stay above US$50 per barrel in 2018 (thanks to a production cut agreement reached by OPEC/Non-OPEC countries extended to the end of the year) and an official exchange rate of N305 to the dollar, the pump price of fuel will continue to be a contentious issue particularly when juxtaposed against sub-optimal production by the country’s refineries and increasing domestic consumption.

This issue was again at the fore, when the Minister of State for Petroleum Resources, Ibe Kachikwu, appeared before a Joint committee on Petroleum (Downstream) of the Senate and the House of Representatives recently. The minister left no one in doubt that in view of the crude oil price (of about US$67 per barrel) and the official exchange rate of N305 to the dollar, the current petrol price template introduced in May 2016 was no longer sustainable. His explanations led to speculations that plans were afoot to increase the pump price of fuel in order to crowd-in independent marketers as well as free the Nigerian National Petroleum Corporation from bearing the additional cost of N26 per litre, representing the difference between the landing cost of N171 and the current pump price of N145 per litre. Happily, both the minister and the NNPC spokesman, Ndu Ughamadu, have refuted media reports to this effect calming not a few frayed nerves.

There is no question that the country cannot afford another fuel price hike not long after the petrol pump price climbed 68 per cent in 2016 from N86.50 per litre to N145 per litre. Comparing Nigeria with either Saudi Arabia or the United Arab Emirates, two countries that recently increased their fuel prices in response to higher crude oil price, would tantamount to comparing oranges with apples not least because the economic conditions in these countries are by far different from that of Nigeria. The high rate of inflation (and even unemployment) in the country today points to the fact that the economy is still reeling from the effects of the last fuel price hike in 2016

So, what is the way forward against the backdrop of the difficulty faced by the independent marketers in complementing the efforts of the NNPC to ensure adequate supply of petroleum products? The minister is reported to have made the following suggestions: getting the Central Bank of Nigeria to sell forex at subsidised rates to fuel importers, granting tax concessions to marketers by the government in order to cushion the high cost of fuel imports as well as adopting a modulated deregulation pricing strategy whereby the NNPC would continue to sell at N145 per litre in all its outlets across the country while the marketers are permitted to sell at market-determined prices.

The options put forward by Kachikwu have flip sides worth examining. Requiring the CBN to sell forex to marketers at lower exchange rates would only amount to shifting the burden of the subsidy from the NNPC to the CBN. At the end, government is still the loser. Obviously, this route will be costly at a time the CBN is battling with the management of multiple exchange rates and seeking convergence of rates across all segments of the forex market. Such a move is also capable of breeding corruption and incentivising round tripping and other sharp practices in the forex market. It will equally not go down well with the country’s international development partners who have been strongly opposed to the multiplicity of exchange rates in the forex market. By the same token, the use of tax concessions for fuel imports is prone to abuse and will only lead to loss of revenue on the part of a government seeking to reduce budget deficit and significantly cut down on fuel imports before the end of 2019.

The take on plural pricing strategy seems to recommend itself. The challenge here is that if there is no means of checking round-tripping (a major problem with price discrimination strategy), it could also breed corruption especially if the price differential is significant to justify buying from the NNPC petrol station and re-selling the product at a profit. Without doubt, snaking queues will be a common sight at the NNPC petrol stations resulting in loss of man hours.

What has become clear from the minister’s submissions is that in view of the rising crude oil price, the NNPC cannot continue to shoulder the responsibility of petroleum products imports alone without the support of the private sector. As Kachikwu rightly noted, “to look at the direction of blanket subsidy for all the importers in bridging the gap would be like going back to a problem that had earlier been solved”. Indeed, many argue that fuel subsidies come with negative consequences for the economy including encouraging wasteful energy consumption, creating fiscal burdens on government budgets, increasing health and environmental costs of fossil fuels as well as helping to promote inequality. In fact, studies have shown that the richest 20 per cent of households in low and middle-income countries use six times more subsidised fuel than the poorest 20 per cent. But then, it is equally a fact that the removal of subsidy would have catastrophic consequences for the poorer strata of society.

Therefore, the right balance that guarantees minimal distortion to the economy is for Nigeria to domesticate a model which has been used with some degree of success in some oil producing countries in Africa notably Egypt and Libya. It is the fuel smart-card initiative whereby interested owners of commercial vehicles, including official vehicles owned by educational institutions, hospitals, religious bodies and government agencies would be required to register and obtain smartcards for purchasing fuel at regulated prices from the NNPC petrol stations. With the smartcards which are swiped at the NNPC filling stations, consumers would be able to buy a limited amount of subsidised fuel, and would need to pay a market price for any extra amount of fuel needed. Private car owners, on the other hand, would be expected to buy fuel at market prices from petrol stations operated by the private sector.

In Egypt for instance, the smartcard project introduced in 2014, not only succeeded in curbing the smuggling of subsidised fuel and widespread corruption, it also freed up funds for the government to execute welfare projects and helped put inflation in check.

The experiences of the North African countries demonstrate that a stop-gap measure that strikes the right balance in fuel pricing, based on careful considerations of expected costs and benefits, can be compatible with government’s macro-economic objectives. That said, it is a no brainer that the only lasting effective pill to the fuel pricing headache in Nigeria is to build the capacity to refine fuel to meet domestic consumption.

 

Comments

comments