Nigeria: Why not a market solution to fuel shortages?

By Rafiq Raji, PhD
Twitter: DrRafiqRaji

Nigerians were in for a rude shock last Christmas. Fuel, hitherto abundant, suddenly became scarce. It was artificial, of course. With the political cycle in high gear, myriad negative events have been on the rise. President Muhammadu Buhari blames saboteurs; perhaps a vieled reference to opponents eyeing the presidency in 2019. While he did not say who they were, there is a consensus, amongst the top echelons of the government, at least, that the shortages were contrived. Senate president Bukola Saraki called it an “artificial scarcity” in remarks when the committee put to task to unearth the causes of the fuel shortages and recommend measures to ensure such misery would no longer be meted out to the citizenry again, presented its report. Typically calm, Mr Saraki’s response was a little emotion-laden; reflective of inflamed passions around the issue. Controversy has always trailed the very politically-sensitive issue of fuel supply in Nigeria. Once a subsidised commodity, it was one of the few benefits citizens could claim to get from the government. Verner Ayukegba, principal analyst for Sub-Saharan Africa at London-based IHS Markit suggests why the Buhari administration would be reluctant to raise fuel prices like other countries have done in tandem with crude oil price movements: “It is one of the few ways in which the government can reach a broad set of Nigerians, especially the struggling masses, with subventions.” John Ashbourne, Africa economist at London-based Capital Economics adds thus: “Raising fuel prices is obviously always quite painful – both economically and politically. The government might be hesitant to raise prices now, given that the economic recovery is still fragile and inflation has only just started to come down.” But there is a greater fear for the government should it choose to increase fuel prices at this time: “The potential fallout is negative public opinion against the government in the run-up to next elections”, opines Mr Ayukegba. Could the government mitigate this, though? “In theory, the optimal policy would be to provide targeted grants to lower income people”, says Mr Ashbourne. [But]…poverty alleviation initiatives – social programs – in Nigeria have often come up short”, Mr Ayukegba adds. There are other ways the government could manage to keep the current fuel price of 145 naira unchanged without paying a subsidy to marketers or at least, prevent a steep price hike in the event it decides to be bold. Capital Economics’ Ashbourne makes a suggestion: “In the short run, the government could reduce landing fees and taxes on importers and hope they pass on the savings.” This was also one of the proposals made by state oil minister Ibe Kachikwu when he made a presentation to the Senate committee in January. Mr Kachikwu also suggested that foreign exchange could be made available to fuel marketers at a rate that makes up for any difference between the landing cost and retail price. Another suggestion he made was for a multiple pricing regime whereby marketers would be able to import fuel and sell at any price that suits them while the state oil company sells its own imported fuel at the government approved price. All three suggestions imply some form of subsidy or in the third case, an average price increase.

Cheap fuel, shady deals
Upon the assumption of the Buhari administration, subsidies were stopped. Even so at about 50 US cents for a litre, Nigeria’s petrol is very cheap. Inevitably, savvy entrepreneurs have been making a good trade of either hoarding the commodity or smuggling it to neighbouring West African countries where petrol is dear. Umar Ajiya, chief executive of PPMC, the state oil company’s distribution arm, reeled out the statistics in a media interview in January to support this supposition. Nigeria’s typical daily consumption of petrol is less than 30 million litres. His firm, the PPMC, supplies about 40 million litres a day. During festive periods, the daily supply could be as much as 60 million litres. Mr Ajiya also asserted that at least one ship cargo of 50 million litres is imported by the PPMC daily. Ordinarily, the PPMC should be a marginal player in a supposedly quasi-deregulated market: although the fuel price is set by the authorities, a reasonable margin is incorporated to make the venture profitable for marketers. Considering the price of crude oil and its distillates in the international markets tends to be volatile, marketers would only be able to make a profit if the set price is adjusted with almost as much frequency as the crude oil price changes. Unfortunately, this is not the case; especially when the price rises. In the recent past, the Buhari administration was able to make upward adjustments to the petrol price, when it still had much goodwill. Now in re-election mode, it has become more cautious. To increase the fuel price at this time would be considered very bold indeed. And it could not now say that it has resumed subsidies on fuel products; after having campaigned to remove them in the first place. It used to be a major conduit for corruption.

Liberalise, deregulate and diversify
But it is abundantly clear that the official price of 145 naira for a litre of petrol is not realistic, having been set when the crude oil price was much lower than current levels of above $60. At a landing cost of 171 naira for a litre of petrol, the authorities take a loss of 26 naira on each litre of petrol sold to the public. Marketers complained the authorities were not making up for the difference and insisted on being paid before resuming imports. With the authorities unyielding, in light of the complication that doing so would also imply an acknowledgement that subsidies were being paid, PPMC became the sole importer of petrol. But if it were still selling at 145 naira and importing at a higher cost, how then was it funding the difference? When pressed hard during the earlier mentioned TV interview, Mr Ajiya classified it as an operating cost. Since PPMC is wholly-owned by the government, that operating cost is borne by taxpayers. Simply put, the authorities have been paying subsidy on petrol. As such payments are extra-budgetary and an infraction by the executive branch, Mr Buhari could ideally be impeached because of them; not that this is likely, though. Another suggestion made by Mr Kachikwu is for the country’s moribund refineries to be repaired and perhaps new ones built. As a lot of resources has been wasted in the past to do so, it is probably a bad idea. They could be sold to private investors instead. Incidentally, this was done before; during the administration of former president, Olusegun Obasanjo. Africa’s richest man, Aliko Dangote, was one of the buyers. The sale was revoked by the next administration, however. Instead, Mr Dangote is now building his own refinery from scratch. It is perhaps why the authorities likely reckon they could continue to take losses on fuel imports to ensure the retail price for petrol remains unchanged at 145 naira in the hope that the Dangote refinery would become operational as scheduled in 2019. When completed, the refinery would be able to refine 650,000 barrels of crude oil into petroleum products daily; enough to supply all of the country’s fuel needs with extra to export. But is this a wise strategy? “I would worry about putting so many eggs in one basket”, says Capital Economics’ Ashbourne; “from a pure efficiency perspective, the best option would be to liberalise prices and then deregulate the import stream to allow more competition.

Since the publication of the above article by African Business magazine in early February 2018, which I authored, the Nigerian government has since admitted paying subsidy on fuel imports: “an under-recovery of N774 million [$2.2 million] every day.” At the African Development Bank Annual Meetings in Busan, South Korea, which concludes today (25 May), a former central bank governor put the figure at about 1.4 trillion naira (circa $3.9 million). And even as the authorities refused to call it what it is, the legislature has since given it the proper nomenclature. Sadly, with the Muhammadu Buhari administration already in election mode, the principal of which is actively seeking a second term, the likelihood that market forces would be allowed to determine fuel prices anytime soon is very slim. The opportunity cost of this supposed “political necessity” is sobering indeed.

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