May 13, 2016 - 12:10 AM EDT
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Is This Deregulation or Price Adjustment?

The Federal Government, Wednesday, announced that it has deregulated the down stream sector of the oil industry. But in the same breath the government said that marketers can sell their products between N135 and N145 per litre of petrol. Just a day after, the PPPRA came out with its price term plate stating that the actual price of petrol should have been N243 per litre. This has raised a fundamental question, is this actually a deregulation or price adjustment?

As it appears, the government finding that it is unable to fund the importation of petrol into the country as a result of scarcity of foreign exchange just decided to allow those who could have access to foreign exchange to import the product and sell at an expanded price.

Deregulation would not permit price fixing by government. If the government was serious with deregulation, it would have scrapped the PPPRA as it would no longer be relevant in the pricing of products or at best redefine its role in price modulation. As it seems, there is still element of subsidy, if the actual price of petrol is about N100 above the PPPRA price. Who in this circumstance will pay the difference?

Equally the government would have removed the Petroleum Equalisation Fund as well as the Bridging Fund used to pay importers the difference between landing cost and transportation of products to different part of the country. As it is today, the two funds and PPPRA are in operation and will continue to play their roles in the distribution of products.

Current scarcity

Before arriving at the new price, the government had a meeting withtop government officials, leaders of the National Assembly and labour unions to discuss the current petrol scarcity.

The minister of state for petroleum, Ibe Kachikwu, after the meeting announced a new price ceiling for petrol of N145 per litre. He noted that the cause of the current scarcity, which has persisted for several months, is the inability of petroleum product importers to source the required foreign exchange at the official rate given the decline in the nation's foreign reserves.

Looking at what the government has done, the pressing issue is that at the moment the outlook for global oil prices remains subdued; as such, a quick build up of foreign reserves is remote and far fetched for the short and medium term. The Petroleum Product Pricing Regulatory Agency's (PPPRA) product pricing template assumes that all transactions for imports are carried out at the official foreign exchange rate. This means that while previously, the template was based on official rate it will now be conducted at the parallel market rate.

Given that around 50 per cent of national petrol consumption was previously met by the private sector, the inability of this group, mainly independent marketers, to source foreign exchange at the official market rate led to an unprofitable venture for many marketers. Hence the NNPC has had to carry the supply burden alone, sourcing its foreign exchange from the central bank with much difficulty.

Realising that the previous strategy did not succeed in meeting the national demand of around 45 million litres of petrol per day, the government has to ditch the approach and throw the gate wide open to those who have the means to import the product. As it seems the federal government prefers pricing modulation mechanism which did not yield the desired result for the economy.

Given that price ceilings are still set by the government it is obvious that government announcement did not usher in full blown deregulation. Price ceilings will be set in tandem with market realities. When crude oil prices rise, the PPPRA's price ceiling will also be increased and vice versa.

The government decision needs further clarification. Does it mean that the quarterly import allocations by the PPPRA may cease to exist and marketers would be allowed to import products as each firm determines? Would the PPPRA's product pricing template's foreign exchange assumption now reflect the foreign exchange rate at the parallel market?

The most important of outcome of the decision is the possibility of the re-entrance of many industry participants, mainly the independent marketers. The policy change also suggests that the PPPRA would have to monitor two variables going forward, crude oil prices and foreign exchange rates at the parallel market, as opposed to only oil prices previously. The major fall out of the policy change is that there will now be an increased pressure on parallel market rates which will continue to widen the gap between the official exchange rate and that in the parallel market.

The Price increase of petrol will trigger off price increases in transportation, food, housing and production cost. If this was full deregulation, it would have enabled players in the medium and long term industry to set up refineries that would ease off the cost of fuel in the country. As it stands the government has just done price adjustment without resolving the issue of the status of the Nigerian National Petroleum Corporation.

NNPC can not be a regulator and at the same time an operator in the oil industry. Full deregulation of the down stream sector of the oil industry in Nigeria, will first unbundled NNPC into several companies, to allow for a level playing field. So long as the PPPRA will continue to determine how much fuel will be sold, government has not deregulated that.

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Source: News (May 13, 2016 - 12:10 AM EDT)

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