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FX Scarcity Casts Shadow over FG’s Deregulation

-By Gideon Osaka

In November last year when the Minister of State for Petroleum Resources, Mr. Timipre Sylva declared that a subsidy element was still being retained in the pricing of premium motor spirit (PMS) or petrol, analysts picked holes in the implementation of the deregulation of the nation’s downstream sector which was announced in the first quarter of 2020.

Liberal economists and other downstream operators raised questions about the sincerity of the government in driving the exercise logically, and the minister’s assertion reinforced the suspicion in many quarters, that there were still some dark, hidden elements in the ‘deregulation’ policy.

Checks by Valuechain based on official data, show that though there is currently minimal price control, there is still some form of subsidy in the cost of PMS principally at the foreign exchange (forex or FX) component of the pricing regime. These facts lends credence to the truth in the minister’s asssertion.

Chief Timipre Sylva

Mr. Sylva, said in September last year that the Federal Government had stepped back in fixing the price of petrol, adding that market forces and crude oil price would determine the cost of the product.

The statement followed the removal of petrol subsidy in March 2020 by the government after reducing the pump price of the product to N125 per litre from N145 on the back of the sharp drop in crude oil prices. However, the price reduction lasted till June as Nigerians started to see increases for four months, with PMS price rising from N121.50–N123.50 per litre in June to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September and N163-N170 in November.

Brent, the international oil benchmark, had risen by about 35 per cent since November 13 when the pump price of petrol was last increased. It closed at $55.99 per barrel on the last week of December, its highest level in 11 months.

Going by the petrol pricing template of the Petroleum Products Pricing Regulatory Agency (PPPRA), the landing cost of petrol rose from an average of N143.60 in December to N158.53 per litre the first week of January 7, with the expected open market price (retail price) being N181.53 per litre.

But the product is currently being sold at between N160 and N165 per litre at many filling stations. This means that there is between N11-N17 per litre subsidy borne by an entity.

However, Alhaji Rabiu Bello,  a former Chief Operating Officer, Upstream Business Unit at the Nigeria National Petroleum Corporation (NNPC) believes that at a pump price of N167 per litre as sold in the last quarter of 2020 before the government was compelled by Labour to reduce the price, Nigerians overpaid for fuel for the month of November alone, thereby subsidising the NNPC to the tune of about N700 million daily.

Speaking at a recent roundtable on ‘Deregulation of Nigeria’s Downstream Oil Sector’ in Abuja Bello said; “The basis of pricing PMS in Nigeria today is the ‘The PMS Market Based Pricing Regime Regulations, 2020’, whereby PPPRA is expected to monitor market trends and advise NNPC and other Oil Marketing Companies on the monthly guiding price of PMS.

“The actual market situation for the current month, including the cost of importing PMS, landing charges, storage, transportation, margins for wholesalers and retailers etc, which are all stated in the PPPRA template to serve as a guide for the price of PMS in the month.

“An independent review and analysis of the PPPRA template by Foster consultants show that actual C&F cost of PMS for the month of October was US$415 per MT (N111.41 per Litre at N360 per US$ Exchange Rate. When you add all the other cost elements in the PPPRA template, the total open market price should be a maximum of N146.75.

“This should be the maximum price Nigerians should pay for PMS in the month of November instead of the N167 announced on November 15.

“The difference of N20 per litre for daily consumption of about 35 million litres will translate to N700 million that Nigerians are paying above the expected open market price. In other words, Nigerians are subsidizing NNPC at an average of N700m daily in the month of November 2020” he argued.

FX subsidy induced by naira devaluation

 Apart from crude oil price which accounts for a large chunk of the final cost of petrol, the value of the naira to the dollar (exchange rate) is another significant price determinant.

The slump in crude oil price induced by the weak global demand on account of the lockdown of most economies due to the continued spread of COVID-19, led to decline in inflows to government coffers especially lower receipts from oil sources. This resulted to strings of devaluation last year by the Central Bank of Nigeria (CBN) which triggered uncertainty for the currency market that has remained disconnected from the reality in the parallel market.

The CBN has since devalued the naira at least three times at the official investors’ and exporters’ window as it strove to bridge the disparity between the official and parallel market rates. The naira was devalued from N307 to about N360 in March and then in August to N379 to the dollar respectively. At the parallel market, it exchanged for over N470 to the dollar.

Mrs. Winifred Akpani

The devaluation of the naira, therefore, led to a significant rise in the cost of imported petrol.

In January 2020, the PPPRA used an exchange rate of N306.90/$1  to calculate the cost of petrol, while N387.63/$1 was used in July. The naira closed around N393.50 against the dollar in December at the Investors’ and Exporters’ Foreign Exchange Window, and 472/$1 at the parallel market.

As of the first week of January 2021, the cost of petrol plus freight stood at $500.72 per MT, translating to N145.62 per litre.

When other cost elements like landing cost: lightering expenses (N4.57), insurance cost (N0.21), Nigerian Ports Authority charge (N2.38), Nigerian Maritime Administration and Safety Agency charge (N0.23), jetty throughput charge (N1.61), storage charge (N2.58), financing (N1.33); wholesale margin (N4.03) and the distribution margins: transporters allowance (N3.89), retailer (N6.19), bridging fund (N7.51), marine transport average (N0.15), and admin charge (N1.23), PMS pump price should be between N175 and N180 per litre compared to the current N160-N170 price band.

PMS still slightly subsidised?

Explaining the FX subsidy component in the pump price of PMS, Sylva who spoke when he appeared on Channels TV programme, Politics Today, stated that if the government completely hands off the pricing regime, Nigerians would be buying at a much higher price.

He said: “Government is no longer in the business of fixing petroleum prices. That’s what was agreed and that’s what is being done. The timing is not a good time, but it is also not a good time for the country. It’s not just a Nigerian problem. It’s a global problem.

“We are still trying to manage this bumpy start. We have not been able to get to the 100 per cent removal of subsidy from the foreign exchange end.

“If we were to actually take it out completely and allow people to access foreign exchange from the parallel market and import the product, the price at the pump will even be more.

“But the federal government knowing the impact this will have on the people decided that they are going to still manage the situation. NNPC is the only one that is able to import and it’s because they generate their own dollars and they are able to import directly from their dollars, ” he stated

“For now, NNPC as the supplier of last resort continues to play that role to supply the products at a slightly subsidised rate. So, it’s still subsidised in a way.

“We cannot say they (NNPC) are accessing dollars at a subsidised rate from the CBN, but they generate dollars from crude oil swap, and use the crude oil swap. Somehow, we know that there’s still a subsidy element and we are not in a hurry to take that off now because if we take that off, it’s going to impact the people much more than now,” he noted.

Valuechain findings showed that the expected resumption of petrol importation by private oil marketing companies after the deregulation of the downstream is yet to materialise as operators continue to lament lack of access to foreign exchange (FX) with the multiple devaluation of the naira limiting their access to dollars. Their inability to access the forex market leaves them with little choice but to continue to rely on NNPC, the sole importer of petroleum products for their inventories.

In a recent media interview, the Chairman of Depot and Petroleum Products Marketers Association of Nigeria (DAPPMAN), Mrs. Winifred Akpani, lamented that “the inability to source FX from the official CBN FX window by independent marketers is continually hindering the effec  tiveness of the principles of demand and supply market forces to correct the current inefficiencies in the pricing mechanisms adopted in the deregulation process.”

Mrs. Akpani also explained that inability of marketers to source FOREX (or FX) creates a situation which can be described as “pseudo subsidy” in the market, suggesting that being forced to sell petroleum products at fixed prices means they cannot recover their importation cost, most of which is paid for in US dollars.

This is further exacerbated by the fact that the federal government regulates pricing irrespective of the unique operating costs of these private oil companies. Also, being the sole importer of petroleum products means the NNPC will likely pass on inefficiencies in managing cost to petroleum marketers, eliminating any chances of efficient pricing that can be obtained from increased competition. The effects of these are low profit margins and ‘never-shifting’ revenue positions, except for exceptional cases.

There has been clamour for government to allow other players into the market to import petrol by making FX available at CBN official rate to petroleum product marketers, like IPMAN, MOMAN and DAPPMAN, in order to make the importation of petrol into the country competitive, reduce the rising cost of the product, and stop the overdependence on the NNPC for its importation and pricing.

They argued that availability of FX to oil marketers would stop the current monopoly in the importation of petrol by NNPC, who has been the major importer of petrol over the years with other players in the downstream oil business buying the product from them.

Getting hold on FX availability

Addressing editors recently in Abuja amid questions over whether deregulation was still on course after the presidency on December 14 announced a N5 per litre reduction in the price of PMS, Sylva explained that the problem was that subsidy was happening at the FX level but that the government was working on getting a hold on the situation.

 “The FX that the marketers accessed to import the product was also subsidized and then when they bring in the product, that product was further subsided at the pump. That was the biggest problem” he said.

“With deregulation, you have deregulated the pump, but there is a challenge with deregulating the FX side because as you know, the FX is simply not available right now. You have a situation where your production has come down by almost half to 1.5 million barrels (b/d) and you know that 95% of FX earnings of this country come from this sector and if this sector is so compromised because of the situation which is completely not under our control, then you have a situation. The CBN simply does not have the FX to give out to those who would like to import this product and this product happens to be very strategic to the national economy” the minister clarified.

“If we have a situation where the FX is immediately not available and we have not gotten a hold on FX availability, then there will be problem. NNPC remains the supplier of last resort, NNPC has to just take that responsibility and continue to import on behalf of the marketers until we are able to sort out this issue of forex availability,” he concluded.

He assured that the government was making every possible effort to get a hold on the situation as active discussions have been on with the CBN.

“When that has been settled, we will have a stable FX rate established for marketers, because if have a situation where marketers access FX from the streets and  import the product, by the time he is landing the product, he will not be able to eventually recover his cost,” he said.