The marketers’ complaint had been expected. Two weeks ago, the exchange rate of the naira leisurely crossed the N300 to the dollar range. On one frenzied day in the opening week of August, the naira hit a record low of N335 to the dollar in the flexible exchange rate window. A panicky intervention by the Central Bank of Nigeria (CBN) moderated it back to N315.
In the last two weeks, the official rate of the naira has been fluctuating between N310 and N315.
The federal government’s deal with marketers that pegged the pump price of petrol at N145 per litre was premised on an exchange rate of N285 to the dollar.
The deal which heralded the partial deregulation of the downstream sector of the oil industry was reached at a time when the CBN was still pegging the exchange rate of the naira at N197 to the dollar.
Market watchers expected the naira to open transactions in the flexible exchange rate window at N310 to the dollar. But CBN’s massive intervention during the inaugural trading in July gave the naira a safe landing that opened transactions at N282 to the dollar.
Marketers apparently enjoyed a huge margin of profit before the naira plummeted.
At the moment, the federal government has not stated precisely how what might be the second coming of fuel subsidy would be addressed.
Isaac Okoroafor, CBN’s acting director for media said last week that the apex bank has no business subsidizing exchange rate for the importation of petrol. He contended that even as the CBN has directed oil firms to sell forex to marketers for refined petroleum products imports, the forex sale has to be on the prevailing exchange rate at the official window.
The logical conclusion from the CBN position is that if the marketers are lucky to get forex from the official window, they would pay anything from N311 to the dollar.
That would be close to N30 per dollar above the reference exchange rate that pegged the pump price of fuel at N145. Last week, the depot price of fuel climbed to N138 per litre from an average of N130 the previous week.
At that rate, when marketers’ profit margin and other costs are added, the pump price of petrol hovers around N155 per litre.
The truth however is that the marketers enjoyed bumper profit margin between May and July when the exchange rate of the naira stayed above the benchmark rate for the deal with the federal government. Even at the moment the marketers are obviously not operating at a loss. The tumbling value of the naira has only narrowed their profit margin. The huge margin of profit before the fatal plunge of the naira was responsible for the stability in the supply of fuel during the six-day strike by the two unions in the oil industry in July. Now that the margin has been narrowed by circumstances that market watchers predicted earlier in the deal with the federal government, the marketers might return to their old ways of creating artificial scarcity by selling with one pump.
While the CBN insisted that marketers would not enjoy exchange rate subsidy for the importation of refined petroleum products, Maikanti Baru, the group managing director of the Nigerian National Petroleum Corporation (NNPC) in a rather ambiguous statement last week tried to allay consumers’ fears. He said that the federal government has not authorized anyone to raise the pump price of petrol. The NNPC boss contended that the corporation has 1.2 billion litres of fuel in stock and that there was no fear of fuel scarcity. At current consumption rate, 1.2 billion litres of fuel might not last for two months.
Baru stopped short of addressing the issue raised by the plummeting value of the naira which has dropped below the reference exchange rate that determined the pegging of the pump price of fuel at N145 per litre.
The federal government has two options if it is determined to avoid fresh fuel price hike that could trigger social unrest with unpredictable consequences. It would either subsidise the exchange rate for the sale of dollars for the importation of petrol or re-introduce the grossly abused fuel subsidy regime. Exchange rate subsidy appears to be a more manageable option under the circumstance. Government could pay the fuel import bills directly to the exporters to avoid the diversion of dollars by corrupt marketers.
The choice between the second coming of fuel subsidy and exchange rate subsidy would have to be made in the next few days if a return of the long, winding queues at fuel retail outlets must be avoided.
[BluePrint]
