For the first time in more than one year, the market capitalization of the Nigerian Stock Exchange (NSE) crossed the N9 trillion mark last week. Market capitalization is the total value of stocks listed in the equity section of the NSE. The signing of the 2016 Appropriation Bill into law by President Muhammadu Buhari could not accomplish that feat even with the potential for fiscal expansion embedded in the budget.
The NSE All Shares Index (ASI) surged to 26, 441 just after Ibe Kachikwu, the minister of state for petroleum and group managing director of the Nigerian National Petroleum Corporation (NNPC) announced the deregulation of the downstream sector of the nation’s fraud-riddled oil industry.
Investors in the NSE greeted the news with unprecedented enthusiasm. They expect the policy to free the economy from the merciless grip of fuel marketers, spur up production and enhance returns on investment. In the larger society, news of the deregulation was greeted with mixed feelings, though majority approved it. An opinion poll showed 41 per cent approving deregulation while 32 per cent disapproved. The rest were undetermined.
The decision by the federal government to end the cesspool of fraud known as fuel subsidy is a hard one. The standard of living of the populace is abysmally low. The decision would worsen it in the short term. The truth however, is that with foreign reserves at $27 billion, there is a limit to how much the federal government could dole out for fuel imports even at open market price.
With oil price inching up to $45 per barrel, subsidy on premium motor spirit was sailing perilously close to N13 per litre. As subsidy fraud raises fuel consumption on paper to 45 million litres per day, the federal government needed N540 million daily as subsidy on petrol. That huge sum benefited only marketers and a handful of consumers in Lagos and Abuja. The rest were buying fuel at black market price. The subsidy regime could only perpetrate fuel scarcity and cripple the economy.
The decision to open the market to all importers would reduce the pressure on government’s lean reserves and free resources for tackling infrastructure deficit. The federal government last month pleaded with foreign partners of the multinationals in the upstream sector of the oil industry to bring in fuel from their refineries abroad to bridge the yawning supply gap in Nigeria.
The plea fell on deaf ears because the multinationals knew that their subsidiaries in Nigeria were as forex-strapped as the federal government itself. Payment for any fuel ferried in from their refineries abroad would have to wait till the federal government is able to settle subsidy arrears. Business men are too impatient to allow their hard earned money to be tied down by the clumsy decision process of politicians. No one was willing to bring in fuel. The scarcity persisted.
Even within Nigeria, the subsidy regime had plagued the distribution process with inveterate fraud. NNPC was the importer, regulator and marketer rolled into one. With the paucity of forex, the major marketers were no longer importing fuel because Buhari just managed to offset the subsidy arrears of more than N600 billion left behind by the immediate past administration.
The payment was grudgingly made last December and no one could guarantee the next payment.
That left NNPC as the sole importer of fuel. The corporation has storage facility for less than 60 per cent of the fuel imports. With the scarcity of forex, even NNPC could not import the 60 per cent it was authorized to handle. The economy was running with less than 40 per cent of the required fuel. The scarcity fertilized the ground for corruption. NNPC officials were accused of selling fuel to depot owners above the recommended price. Depot operators topped their own margin and sold to retail outlet operators at N130 per litre instead of the official price of N77.
That corrupt process pushed the pump price of petrol to N150 per litre in Lagos. In the hinterland, the product was selling at anything from N200 per litre. NNPC was importing at official exchange rate of N197 to the dollar, but the pump price of fuel remained at the parallel market rate of N320. The consumer was being ripped off while money needed to subsidise production in critical areas like agriculture went into private pockets. The Department of Petroleum Resources (DPR) knew everything but cleverly played the ostrich.
The decision to end subsidy is a bold political step that should be tried out. If the multinationals flood the market with fuel, the price would automatically drop below N145.
However, the price of petrol should not be left for marketers to fix like that of diesel. The Petroleum Products Pricing Regulatory Agency (PPPRA) should determine the profit margin of the marketers while the DPR monitors implementation and promptly sanctions defaulters. Anything short of that would leave consumers at the mercy of marketers.
They do not believe in the fixing of fuel prices through interplay of the market forces of demand and supply. We would be repeating the ruthless exploitation in the diesel and aviation fuel markets if we rely on market forces.
