The government, which found the will to get the refineries working as they were not in 2012 and have not been for over 30 years, desires to meet the full needs of the local market in the short-term through importation of the shortfall, and in the medium-term through raising the capacity of the existing refineries and realization of private refineries.
I am writing to clarify my views on the federal government's removal of petroleum subsidy and to respond to an opinion piece regarding the policy written by Law Mefor.
In his back page column ‘Armed Words,’ published by Authority Newspaper of Thursday May 19, 2016, Mefor’s interesting piece which nonetheless reflected misunderstanding of the core issues or a twist, wanted the government to ‘christen’ the action it took in review of operations in the downstream oil sector.
"There are ‘discordant tunes' coming from the government. Some say it is subsidy and others say it is not; that government is only responding to exchange rate, price of crude in international market and our porous borders," the columnist averred.
First, are there really discordant tunes coming from the government? I do not feel so. Mefor may have missed it when the Minister of State for Petroleum called it a ‘Price Modulation Mechanism,’ and it might help to fill in the blank spaces for him and others who share his understanding on the matter. But certainly christening does not a good Christian make.
What the government did, as conveyed in the official statement signed by the Minister of State for Petroleum, Dr. Ibe Kachikwu, was introduce a ‘Price Modulation Mechanism,' which in my own understanding, expressed in my own words, liberalized and opened up the importation quota of refined Premier Motor Spirit (PMS) in the country beyond the regular NNPC suppliers, in the rank of which are legal and illegal beneficiaries of petroleum subsidy before now.
Why import quota? The combined local production capacity in the refineries just activated add up to roughly less than 50 percent of the local consumption. The government, which found the will to get the refineries working as they were not in 2012 and have not been for over 30 years, desires to meet the full needs of the local market in the short-term through importation of the shortfall, and in the medium-term through raising the capacity of the existing refineries and realization of private refineries. The same government in the long run desires to export the products because a combined capacity of the three local refineries, 18 to 25 private refineries licensed by government, and new modular refineries to be introduced by government will be enough to surpass the needs in Nigeria and spill over into export.
The same statement by Dr. Ibe Kachikwu illustrated graphically the challenge that regular PMS importers have in raising the required foreign exchange, which is scarce to be able to import all the required volume of the products. What Kachikwu did not say and would not need to repeat is that the official currency exchange is prioritized for industrial raw materials with the capacity for rebuilding our economy and retaining jobs to address unemployment. Hence, you do not expect a focused President Muhammadu Buhari (PMB) to approve that the large chunk of these industry-targeted reserves will go into importation of fuel for consumption. PMB would rather give priority to those things that raise the capacity of the refineries and emplace new ones for the given reasons.
Yet while desiring to get the refineries working in their full capacity and to build new ones, there are still short term issues to address. So with the scarcity of foreign exchange in the official channel, what alternatives are open? Sourcing outside that channel that comes in. So, it becomes logical that the two foreign exchange channels cannot lead to the same landing cost for the product.
To accommodate a desired quantity of that product to take care of the local needs, the government simply invited any marketer to source foreign exchange in the secondary market and allowed for the market price under which this alternative sourcing would make a profit to remain sustainable. No further christening is necessary and no contradictions are in the horizon. Subsidy was hardly an issue here.
I would come back to petroleum subsidy as a term applied in Nigeria’s downstream sector, situations past and present. But first let me take on the three factors Mefor tried to X-ray in his piece, which agreed in part with similar questions raised to me on radio.
While acknowledging the slide in the value of Naira against the Dollar, Mefor opines that it was avoidable if he feels that the policy drivers in an APC–controlled federal government acted fast enough. He said, "Without a discernible economic team, the Nara was allowed to take half a dozen free falls." Of course the meeting that preceded the official press statement of the Dr. Kachikwu was that of the economic team with additional stakeholders in the Ministry of Petroleum based on the issue at hand, the National Assembly, the Minister of Labour & Employment, and organized labor.
Some elements in the Nigerian elite class have found it, for various reasons, convenient to re-echo that the federal government has no economic team. From here I can discern three groups: those who feel they should be in the economic team but are not there; those who find it convenient to pick up the mantra from the former group to score ready-made political points; and those who are not putting a thought at all to it or discerning the argument simply to jump on the bandwagon.
Addressing all three now and the rest of Nigerian, the federal government has a formidable economic team headed by Vice President Yemi Osibajo, peopled by the Ministers of Finance, Minister of State for Finance, Governor of Central Bank, Minister of Budget and Planning Chairman of the EFCC, Chairman of Securities & Exchange Commission. This team can of course draw the expertise of any other person in and outside government. That effectively addresses the issue of having a discernible economic team. It is needless to say that this team and their principal, the president, may or may not agree with all propositions from all interests in the positioning of Nigerian economy. And certainly, those whose views are not accepted have a view and a reach. But the buck-passing stops at the desk of the President, from which his economic team derives its powers.
Regarding the free-fall, yes the Naira slid, but since the economic team has always been there, it may not be because of not having an economic team but by other factors which still relate to the international pricing of crude that limits currency inflow in Nigeria, the importation profile of Nigeria and the deficit in exportation of value-added products to balance same. This challenge has been partially, but effectively addressed by the economic diplomacy taken by PMB in respect of inflow of alternative currencies, even amid scathing criticisms from those who could simply need to understand the strategies a little more. But those paying attention will also understand that gains have been recorded on all fronts-international price of crude oil, import substitution for genuine imports and import elimination for fraudulent import clams, which also dovetail into the anti-corruption crusade.
Of course the federal government has accepted the slide in the Naira as a challenge and is addressing same squarely by raising all fronts in the productive sector and operating maximally in its area of influence to shore up the international pricing of crude oil. That puts the second factor behind us.
The third and last factor according to Mefor is the diversion of petroleum products which he writes made the government ‘increase the price of fuel and fix the price N50 above the price it would have been if government was to fully deregulate.’ Again in the prelude Mefor argues that it is not the duty of NNPC staff to check diversion. I agree, but would not be too sure about which of Kachikwu’s statement he is citing, because Kachikwu was clear in his Lagos Town Hall Meeting that the problem is not intractable, but to resolve it effectively, ‘you would need a whole army, which we cannot afford now because of their engagements in other equally important challenges.’ I would be surprised if the man that drew superlative ovation from this lucid illustration of the issue in Lagos expects that NNPC staff would be chasing tankers to Cameroun and Niger Republic. But since the minister was neither quoted, nor the context supplied, it might just be down to a misconstrue of the issues.
The government did not fix the price of PMS. It suggested a cap which the expected price from Petroleum Products Pricing Regulation Agency (PPPRA) should not surpass. That to me is indicative of a government that is proactive and sensitive to system abuse that could let the masses suffer if an emergency oligopoly results from an otherwise well-intentioned policy line. Those who insist straight from the textbooks that a deregulated market ought not to have any price mentioned may not have considered this possibility that could make interested parties return a thunderbolt price of N500 if government turns its back in one fell swoop. So why would the government not evolve a control and vote it in with its feet through NNPC filling stations? Was that not what M-TEL did for the GSM subsector with celebrated success?
Another area so badly misunderstood is the arrival at the price. I have not tried to assume more competence than those in the Ministry of Petroleum Resources on this matter. I am content with understanding that upon arrival at the computed profit price, the ministry has left an error margin of profit to cater for the dynamics in the industry. So I do not readily see an ABSOLUTE N50 margin, emphasized by Mefor. Yet I know that in a market where competition is expected to play a key role in stabilizing prices, there must be ample room to play with, and to provide that competitive edge.
To that extent Mefor, who expressed surprise that government allowed as much as N50 margin from ‘full deregulation costs’ was correct in his reading of the price detail sheet from the Ministry of Petroleum, but was not so right when he quoted the Minister of State as saying that Nigeria should expect a new price regime in a few months.
Kachikwu was alluding to the expected competition arising from the opening up of the importation mechanism beyond NNPC-accredited importers. However, learning fast from outcries that came, when like a technocrat he is, he tried to predict with mathematical accuracy when the petroleum scarcity would abate, without embellishment, he has stopped short of saying if the prices will drop as he may be hoping or rise momentarily for other factors. That statement should not be over-interpreted. But I vote on the side of optimism, hoping that those who will refer to this statement will remember to attribute it to me, and not Kachikwu. The caveat is vital because the post-election remarks of Tam David-West, Professor of Virology and former Minister of Petroleum, when the refineries stopped working under Babangida regime, as expressed in his hope to return fuel to N40 per liter if he returns to the Ministry, has since translated to Buhari’s promises in the imagination of those who would rather extend the campaigns of 2015 elections than face 2016 realities. This category of persons fails to emphasize that David-West’s statement, not made on behalf of APC, was made after the elections .
Of course, PMB’s stoic silence on that orchestrated distraction of a no promise that PMS will sell at N40 per liter and the Naira will fall at par with the US dollar, all by fiat, meets with my admiration.
To return to subsidy, I need to draw everyone’s attention to the details of the 2016 budget as approved by the National Assembly and signed by the president. One is not likely to find any amount appropriated for the payment of subsidy for PMS. That action is six months old, and to my knowledge, N1.2 trillion cannot hide in a N6 trillion budget that discovered smaller unidentified flying headings. This is why subsidy will not feature now in any statement coming from anyone serving in the federal government and the debate has since progressed to issues of post-deregulation.
Those issues come with the promise of working refineries, sustaining jobs and a chain of petrochemical companies, bridging a supply gap and translating to cheaper prices and an export market. But before that El Dorado there are enough palliatives totaling N500bn, outside issues of wage negotiation, including the highly twisted N5000 monthly to the most vulnerable persons. Opposition tried derisively to sow a fake version of this particular palliative in the federal legislature, but failed. They twisted it as N5000 payment to unemployed.
As a 15-man technical committee, led by Senator Chris Ngige, Labour & Employment Minister, roughly half of which are made up of labor leaders translate these palliatives into action, it would be clearer to all that APC’s plan for unemployed youth is employment. Our party’s plan for primary school children is one meal in a day. Our plan for post NYSC graduates is the skill acquisition to employ themselves, plus interventions in raising an army of teachers and empowering unemployed platoons of women and youth in pink-collar and blue-collar jobs.
Let’s give this new policy a chance, take advantage of the palliatives, and reconvene in six months to take stock.
Mr. Madukaife serves as Anambra State Publicity Secretary of the APC and Secretary Conference of APC State Publicity Secretaries (CAPS). He writes from Awka.