Unification of FX rate has averted petroleum industry crisis, surging inflationary pressures in Nigeria- Experts reveal
… predict FX convergence will reduce pump prices in a few months
Oredola Adeola
The unification of the foreign exchange (FX) rate has averted what would have been a serious Nigeria’s downstream petroleum industry crisis, and surging inflationary pressures, according to experts.
They noted that without the unified exchange rate which paved the way for other players to participate in the downstream sector, the import monopoly enjoyed by NNPCL would have led to acute foreign exchange scarcity and severe collapse of liquidity in the market.
The experts in separate chats with EnergyDay – against the backdrop of the unification of all segments of the Nigerian forex market by the Central Bank of Nigeria (CBN) – therefore projected that the Nigerian National Petroleum Company Limited (NNPCL) would soon run out of old stock, while the new petroleum products marketers are expected to commence importation by July having sourced for USD at Investors’ & Exporters’ window.
This development according to them will end the petroleum products importation monopoly enjoyed by the NNPCL.
They said that the NNPC is expected to cut down on its petrol import volume to give room for other players in the industry, even as some mega oil marketers are expecting PMS cargoes in July 2023.
EnergyDay gathered that by the provision of the industry regulations, the NNPCL is allowed to import more than 30% of the markets, while the private sector players are expected to provide the remaining 70%.
Recall that the NNPCL, before the deregulation, has been enjoying an exchange rate lower than the Central Bank of Nigeria’s (CBN) official rate for all its transactions.
The experts said that while the FX convergence is speculated to push petrol prices even above the NNPC’s retail price template of between N488 to N557 per litre, to around N650 and N700, the participation of the newly licensed importers will drive down the pump price to a reasonable level.
Adigun Ademola, an oil and gas policy expert who is the Team Lead, Facility for Oil Sector Transformation, said that there couldn’t have been proper downstream product deregulation if President Bola Tinubu had not approved the unified exchange rate.
He said, “The national oil company has enjoyed a monopoly in the imports of petrol because of this, no marketer could compete with NNPCL retail.
Ademola therefore revealed that the unification has the potential for cheaper prices of petrol in the next few months.
Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PricewaterhouseCoopers (PwC) on his part revealed that a significant market distortion in the downstream sector has been removed now that the Naira is exchanging in the official forex market at market-determined rates.
According to him, this would have a possible impact on the pump price of petrol which could inch closer to the current price of diesel.
Professor Wumi Iledare, Professor Emeritus in Petroleum Economics and Policy Research at the Center for Energy Studies, Louisiana State University, USA, on his part, said that the floating of the Naira is something that has been anticipated for many years.
He said, “We have waited for two things to happen to Nigeria’s economy for many years. The petroleum downstream deregulation and multiple exchange rates have over the last decade made the economy anemic.
“Of course, short-term pains are expected as a result of this drastic, but necessary, actions of the new administration, however in the long run, the Nigeria’s economy stands to benefit much more than the short-term pains.
“The price of enduring love is a short-term pain! Certainly, what to watch out for is sustaining the policy beyond the short-term pains of these laudable actions.
“Usually, those people who have benefited from dual exchange rates will not fold their arms. The most important actions is the presidential appointments of the next CBN governor and petroleum minister,” he noted.
Professor Iledare however charged the 10th National Assembly to ensure that they are committed to the course of reducing the uncertainty in the foreign exchange market.
Dr. Yusuf Muda, Chief Executive Officer, the Centre for the Promotion of Private Enterprise [CPPE) commended the bold step taken by the Tinubu administration towards the unification of the naira exchange rate.
He said that the liberalization of the foreign exchange market would unlock the huge potential for investment, jobs, and capital flows. Investors’ confidence would be positively impacted.
Dr Muda said that the unified exchange rate regime will strengthen the supply side of forex for importers of petroleum products and also boost investors’ confidence.
Dr. Boniface Chizea, an economist and MD/CEO – BIC Consultancy Services on his part, urged the CBN and the FG to stay the course.
He noted that there have been several attempts, in the past, to float the exchange rate in response to the prodding by the International Monetary Fund and the appreciation of the sheer difficulties with demand management; adding that the authorities did not have the political will to persevere and stay the course due to the consequences.
He therefore noted that the Federal Government and the regulatory authorities must allow the major marketers to source independently and import products under the oversight of the relevant regulatory bodies for purposes of guiding against collusion to fleece buyers and for product quality assurance; and no more.
He said, “By this approach the market will then determine the prevailing pump price at each point in time.
“It is obvious that what the pump price will be in the near future will depend on the extent to which the authorities are able to resist the inevitable pressures that are bound to be piled up by entrenched interests,” the CEO, BIC Consultancy Services said.
Dr Chizea, therefore urged the Federal Government to aggressively push for Dangote Refinery to come on stream, adding that the encouragement should also be given to owners of other private refineries.
He therefore noted that the government-owned refineries must be quickly privatized, while the licenses for modular refineries must be issued generously so that capacity for local production of fuel can be boosted.
According to him, if Nigeria is able to achieve these suggestions, the issue of petrol subsidy payments will be redundant as there will be no longer a need for importation of the product.
Kelvin Emmanuel, Co-founder, CEO, Diary Hills, however observed that the current stock of petrol in Nigeria will not last beyond the end of July, if Dangote doesn’t start delivering the product through distributors by the first week of August, Petrol prices will go up to at least N750 per litre.
He said, “The exchange rate unification means that the Central Bank has collapsed all the windows for your Form A to Q. No more PTA/BTA, form M at government-subsidized rates.
“Ex-Depot price of PMS in Nigeria was $0.86 per litre benchmark at N615 per USD, this is before deregulation.
“The petrol that is currently consumed in Nigeria was imported by NNPC at former official peg. What will happen to 86 cents per liter when the benchmark for I&E rates go from N615 to N702 per USD? What will happen, especially when the NNPC will no longer have control over setting pump price in the markets?
“As the market continues to do price discovery, the spread between I&E and float rates will close ranks and settle within a more predictable range. Hence, the price will continue to go up,” the CEO, Diary Hills noted.
Emmanuel therefore noted that the only reprieve to avoiding USD exposure at the short run is for the Dangote refinery to come on stream before the end of the year.
