Henry Boyo
Crude oil prices wobbled alarmingly,
well below Nigeria’s modest budget benchmark of $38/barrel for several
weeks, but, unexpectedly flexed above $40 in early April to rekindle
hopes that the fortuitous price spiral will be sustained to partly fund
the N2tn plus 2016 projected deficit and to partially also satisfy the
clearly bloated excess market demand for foreign exchange.
Thus, if by some “strange turn”, oil
prices further bounce back beyond, for example, $60/barrel this year,
the almost $5bn projected external loan in the 2016 budget will become
unnecessary. Consequently, further debt accumulation which already cost
us an arm and a leg to service, will also become restrained.
Furthermore, any increase in dollar income from higher crude prices
should also redress the current market scarcity of dollars and
supportively provide increasing cover for our import needs, particularly
the raw material requirements of the real sector and the fuel imports
of private sector marketers to ensure adequate daily national supply of
petrol.
The recent extended fuel scarcity has clearly demonstrated that the Nigerian National
Petroleum Corporation does not have the capacity to monopolise fuel
imports and successfully satisfy market demand.
Regrettably, however, increasing dollar
revenue from higher crude prices may not improve the official naira rate
as often popularly expected. Indeed, in this regard, we should be
reminded that the naira exchange rate remained almost static around
N155=$, even when oil prices exceeded $130/barrel and the Central Bank
of Nigeria consolidated more than $60bn reserves. Consequently, it is
therefore unlikely that a relatively more modest rise of just $60/barrel
would stimulate the naira exchange rate.
Nonetheless, the parallel market
exchange rates may recede closer again to the official rate, if the CBN
once more deliberately creates opportunities to liberally allocate
dollars to the black market, as was inexplicably the case, until this
reckless policy was terminated earlier this year.
Conversely, however, both the parallel
and official naira rates will improve considerably if the CBN can
successfully manage the naira supply at the right equilibrium that will
significantly reduce the persistent burden of surplus naira which
invariably weakens the value of our currency in the forex market. Thus,
if naira supply is optimally managed against the prevailing level of
productivity by the CBN, the local currency will gain more respect and,
increasingly become adopted as a stronger store of value by patrons.
However, the official naira exchange
rate will, inexplicably, regrettably though, remain relatively static,
even if crude prices spike, totally unexpectedly beyond, a “fortuitous”
premium price of, say, $200/barrel. Ironically, crude prices at such an
extreme level will actually cripple our economy. The bounteous dollar
income will grossly compound our liquidity problems when these funds are
impulsively substituted with naira allocations by the CBN.
Consequently, inflation rate and cost of funds will be propelled
dangerously beyond 20 per cent, while the CBN’s monopolistic auctions of
the dollar it earlier captured from crude oil sales will sound the
naira’s death knell and lay the economy comatose.
In this regard, it is useful to remind
ourselves that poverty actually deepened steadily in Nigeria as crude
prices rose from below $10/barrel to over $140/barrel in recent years.
Curiously, more Nigerians dropped below the poverty benchmark income of
$2/day at a time reserves were more bountiful than when reserves were
relatively much lower decades ago. Thus, in the light of our past
experience, we should be wary of any propaganda that may suggest that
our economic challenges will become resolved if only crude prices rise
significantly once again, to swell the CBN’s dollar reserves.
Ironically, however, higher crude oil
prices have always instigated a corresponding rise in the domestic price
of fuel to make deregulation of the petroleum downstream sector very
unpopular. For example, open market petrol price fell below government
regulated price of N87/litre when crude crashed below the $38/barrel
budget benchmark this year. However, this unusually low oil price,
invariably, also precipitated cheaper open market pump price without any
subsidy. In fact, the NNPC reported that a net profit of up to N6/litre
was actually being generated in place of subsidy. Nonetheless, as crude
oil prices crept above $40/barrel, the open market price of fuel once
again exceeded the regulated N87/litre. Indeed, the Petroleum Products
Pricing and Regulatory Agency pricing template indicates that the open
market price of fuel was about N96/litre on April 14. In this event, a
N9/litre subsidy once again returned on fuel price.
Consequently, if crude oil price
unexpectedly also, for example, climbs beyond $60/barrel, the
deregulated open market petrol price will invariably approach
N130/litre. However, it is likely that motorists who were constrained to
pay N200/litre during fuel scarcity, may not readily accept N130/litre
pump price, in the absence of scarcity. Thus, although rising crude
price is desirable, as it favourably boosts our foreign reserves, it
also has the collateral downside of pumping up the domestic price of
fuel to make deregulation very unpopular, and to unfortunately also
restrain serious interest in the establishment of private refineries.
So, while the sustenance of higher crude
prices will improve our forex capacity to comfortably pay for critical
raw materials and fuel imports, the same premium crude oil prices may
invariably also instigate higher pump prices to once again compulsively
accommodate annual subsidy payments of over N2tn, (about 30 per cent of
the 2016 budget) if the actual open market pump price approaches
N130/litre. Thus, in such an event, any increase in crude oil prices
will instructively become a double edged sword.
However, there is the popular perception
that since crude oil is drilled from our own backyard, it is therefore
our entitlement to enjoy cheaper petrol prices. Unfortunately, this
expectation is misguided, because, cheaper dollars should essentially be
our actual entitlement, as tens of billions more dollars accrue to the
treasury when crude prices rise. Furthermore, cheaper dollars should
correspondingly translate to a stronger naira exchange rate. Meanwhile,
increasingly stronger naira exchange rates would conversely make fuel
prices steadily cheaper, even without subsidy. For example, if naira
appreciated to say N100=$1, as it should, if crude price and output
improve significantly, the open market pump price of fuel will similarly
collapse below N50/litre, i.e. below the erstwhile regulated N87/litre
price, if crude oil remains at current prices.
It is also interesting that although
petrol price will become cheaper nationwide, the stronger naira exchange
rate will however also serve as an efficient clinical deterrent to
cross border petrol smuggling. Ultimately, Nigeria’s actual daily
consumption of petrol will be more correctly determined. Furthermore, up
to 20 per cent per litre sales tax can be levied on petrol consumption
to consolidate over N800m daily, even when the deregulated pump price
still remains below the present regulated price of N87/litre.
However, the most disturbing feature of
higher crude prices and bountiful forex reserves is actually its
disenabling impact on the critical monetary indices which necessarily
drive diversification and inclusive growth in more successful economies.
Curiously, the bountiful reserves the CBN consolidates from higher
crude prices, inexplicably, instigate the distortional economic burden
of persistently surplus naira values that erode our currency’s value in
the money market.
It is undeniable that the CBN has
seemingly waged relentlessly futile battles to reduce persistent naira
surplus in the market and avert inflation. Instructively, however,
unrestrained excess naira supply weakens the naira and inappropriately
fuels inflation well beyond best practice rates around two per cent. In
addition, the prevailing high cost of funds above 20 per cent to the
real sector, steadily weaker naira exchange rates and high fuel prices
are all products of incurable excess naira supply in the market.
Incidentally, however, the burden of
persistent excess naira supply with its disenabling economic
consequences, become primarily sustained when the CBN unceasingly
substitutes and prints fresh naira allocations for dollar denominated
revenue.
SOURCE: THE PUNCH NEWSPAPER
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