October 31, 2008
In the spirit of deregulation of the downstream end of the petroleum sector, the government decided to let the market determine the price structure of domestic fuel in 2004. The erstwhile fuel subsidy of over N350bn per annum was removed and the bridging fund allocated for distance haulage abolished. The government also hurriedly dismantled tollgates on all federal highways and set aside a fund of about N10bn to acquire mass transit buses and fund other palliative measures to reduce the inflationary impact of higher fuel prices on the general price level, especially for food and pharmaceuticals.
The government speculated that savings from the abolition of fuel subsidy would be deployed to crying areas of need in the economy, particularly agriculture, health, education and mass transportation. However, subsequent developments suggest that government’s noble expectations may have been truncated. The Chief Executive of the NNPC was reported in various media to have insisted that the government was once again subsidizing fuel with about N11.00/litre. Some cynics have extended this to mean that the current subsidy (2005) will exceed the initial N350bn which was cancelled in 2004! Some analysts see this as a bizarre de ja vu, while for others, it as a prime example of inconsistency in government policy!
The dilemma of the NNPC may appear inexplicable, but the truth, which our authorities have refused to accept all along, is that a deregulated petroleum sector will produce adverse contradictions so long as the supply end of the foreign exchange market remains a monopoly of the Central Bank of Nigeria. I have maintained this position in various media over the last two years and it is regrettable that we have to continue to suffer for so long until the dynamics of rising international crude oil prices and our faulty exchange rate mechanism make the acceptance of this reality inevitable! Petroleum marketers have rightly refrained from own imports of fuel for domestic sale so as to avoid the subsidy trap! Meanwhile, NNPC presumably now purchases crude oil at international rates as against the discounted prices and flexible allocation privileges it enjoyed under regulation. It does not require a soothsayer to predict that unless there is another policy somersault; NNPC will be very hard pressed to present a pleasant statement of their trading account this year! (2005).
Indeed, such a reversal of policy has already been forced on the NNPC/PPPRA structure. The N1.50/litre bridging fund which was abolished about 12 months earlier is once again unexpectedly back in the cost template of fuel prices, while the spirit of deregulation has moved into the cooler as the PPPRA continues to find relevance in fuel price determination!
Tollgates were hurriedly dismantled on federal highways at great cost of about N400m in the wake of deregulation, while a highway tax of N1.50/litre was introduced into the cost template for domestic fuel. It is difficult to imagine the possibility of collection of this highway maintenance tax in the current scenario where NNPC is groaning under the yoke of an internally borne increasing subsidy! So, it may be safe to assume that little or no revenue is being realized from the highway tax, which analysts have condemned as inequitable, since fuel users would pay the tax even if they did not travel on any federal highway. On the other hand, the erstwhile revenue, even if meager, that was derived from toll gates had been lost as a result of what some observers described as Executive impatience!
The mass transit buses which formed the bedrock of the palliative measures to cushion deregulation, are yet to be seen on our roads (April 2005). The cries by the local Vehicle Assembly Plants that the vehicle importation option was ill advised have received no recognition. The operators of local Assembly Pants have pointed to the gains in employment and income for their Nigerian workers and local suppliers with the expected trickle down effect on the economy if the sum of N10bn had been pumped into their subsector. Instead, the authorities have preferred to prop up employment and industrial production in foreign countries, with our hard-earned dollars!
In any event, critics have argued that even if the imported mass transit buses finally arrive, they would be fueled at current pump prices. Thus, though the volume of buses may increase marginally in the urban areas, the cost of transportation will remain a grave burden on the pocket of the masses! In the event that a feasible replacement strategy and service and maintenance facilities are not put in place, even the availability of these mass transit buses will only be for the short term. Sooner than later, the carcasses of these buses will begin to assault our sensibilities in every corner of our nation. The fate of our countrymen who have demanded improved water transport system in the riverine areas will also not be different.
The import duty on certain pharmaceuticals were also reduced as part of the palliative measures, however, the market is yet to witness any significant fall in the prices of these drugs. Be that as it may, the answer to the question as to whether or not the masses are better off with deregulation and the palliative framework is blowing in the wind. It is clear that the much acclaimed virtues of deregulation and the benefits of a free market in the downstream oil sector have remained a dream. The masses have been encouraged to be patient as these things take time to crystallize, but the masses are worried at their continuing powerlessness against rising prices and their depleting purchasing power!
These fears are no doubt real, especially in the face of rising crude oil prices which International Energy Agencies have predicted may reach $100/barrel in the next year or so. When this happens, the pump price of fuel in Nigeria will exceed N100/litre and subsidies may account for 50% of this price. It is difficult to see how NNPC can cope with this level of subsidy if it continues to pay for its crude oil allocations at current international rates. Meanwhile, it is unlikely that oil marketers will want to burn their fingers through own imports as they will prefer to ride on the back of NNPC for the foreseeable future. The reality is that even if more refineries come on-stream in the next 18 months, this will only impact marginally on the domestic price level by less than 10% (i.e. freight cost of export of crude oil and import of refined petrol, kerosene, etc.). In other words, if international crude oil prices approach $100/barrel, our local refineries may not be able to sell at below N90/litre if imported fuel sells for N100/litre.
However, if the CBN stops the unilateral substitution of naira allocations for our dollar export revenue as constantly proposed in this column, the local fuel prices will fall as the international price of crude oil rises and our reserves swell with more dollar revenue! A word is enough for the wise!
The above is an edited version of the article first published on 25/04/2008. Its relevance is reechoed by media reports of N1,500bn current fuel subsidy and the return of toll gates; meanwhile, government’s shadow chasing continues.
Save the Naira, Save Nigerians!
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