How petrol, forex interaction affect pricing
Economic experts are optimistic of stability and gradual fall in prices of Premium Motor Spirit (PMS) or petrol in the nearest future. While the removal of subsidy on the commodity has pushed the prices of petrol to all-time high, they expressed optimism that with the ongoing reforms in the critical sectors progressively taking shape, in no time, Nigerians will begin to see the effects in not only petrol pump price, but also across the economy.
Recent projections by investment bankers were that the naira would strengthen by year-end to between N550 and N600 to dollar. However, it is also expected that petrol prices will decline within the same period. This is because naira exchange rate to the dollar has direct impact to what petrol importers pay for the import of the commodity.
Economists and financial experts, who in various chats with The Nation, explained that the soaring rate of the United States’dollars against the naira is as a result of its scarcity. According to them, for long, the country has been defending its currency against the dollar, leading to the later’s depletion.
From their various submissions, unifying the exchange rates is a strategy of bringing in more forex, which at a particular level, will shore up the value of the local currency because of the availability of more USD.
”This will, invariably, lead to the importation of petrol at cheaper exchange rate and the market will equally respond in like manner in terms of pump price,” Mayowa Sodipo, an economist, explained.
According to him, there is a correlation between the exchange rate and the price at which crude oil is sold in the international market. At the weekend, Brent crude was sold at $81.79 a barrel, while the West Texan Intermediate (WTI) sold at $77.07 a barrel.
Such a rise, he further said, presented a double-edged sword. He explained that while it is a blessing for the country, because of Nigeria’s dependence on importation of petrol, what is gained from the rise is lost to importation of refined products.
Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, explained that the pump price is not just a function of the exchange rate, but also that of the crude oil price, particularly at this period that the country is still importing petroleum products. He added that whatever happened to the exchange rate would affect the importation of petroleum products.
Similarly, the Independent Petroleum Marketer Association of Nigeria (IPMAN) President, Chinedu Okoronkwo,admonished that gradually and, at some point, if the government’s policy, especially on the forex unification works out well, then cost of petrol would follow suit.
“If the policy on exchange rate works well, everything will begin to go down. You know we depend on imported fuel, but I assure you that once we have a stronger naira against the dollar, it will also cascade into reduced pricing. This will also enhance healthy competition which will bring out the best in any system,” Okoronkwo explained.
To achieve the needed support for exchange rate, and benefit from this rising crude price, there is a need to immediately ramp up the country’s oil production output capacity massively to boost export earnings and stabilise the local currency.
Investment Bankers at Afrinvest West Africa Plc also advised on steps needed to strengthen the naira, which will invariable led to petrol price reduction.
The Managing Director, Afrinvest West Africa Plc, Ike Chioke, said there was the need to discourage wastage and economic sabotage to enhance fiscal consolidation and attract investors to the economy. He said the government could also review the exchange rate regime to ensure a stronger and stable naira and automate the revenue collection function across key revenue-generating agencies.
Explaining further, Chioke made it known that the government is also needed to identify and target key sectors for radical enterprise transformation and organisational repositioning and develop a deep, broadened, and competitive financial system to support private sector growth and economic diversification.
Managing Director, Afrinvest Consulting, Abiodun Keripe, said the removal of the petrol subsidy is expected to provide fiscal savings of N2 trillion in 2023. This, together with earnings from improved oil exports and non-oil sources, would buoy revenue.
“More interesting is also the impact of FX unification on the reduction in government deficit by about N350 billion, which is a greater gain from oil revenue vis-à-vis increase in external debt service,” he said.
Keripe said the Central Bank of Nigeria (CBN) has implemented measures to control rising inflation, including raising the monetary policy rate by 700bps and the cash reserve ratio by 500bps since May 2022.
He however noted that the monetisation of the fiscal deficit through expensive Ways and Means advances and the CBN’s provision of development finance at subsidised rates, has weakened the effectiveness of monetary policy in taming inflationary pressure.
Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the coming on board of the Dangote Refinery would boost forex reserves and support growth as it would boost revenue generation, increase domestic productivity.
He said Dangote Group ceded 20 per cent equity in the refinery to the NNPC Limited, which would also be quoted on the Nigerian Exchange for Nigerians to get stake from the company. According to him, allocating a percent of the country’s daily crude oil production to Dangote Refinery to process for domestic consumption will further encourage pump price reduction in the long run because it will be cheaper to sell and produce at home as well as it will increase the country’s export earnings thereby affording government more revenue.
Chief Executive, Common Sense Group, Dr. Olumide Emmanuel, noted that the forex unification will eventually ease up most things as it will ensure that people bring in their money, meaning that there the naira will eventually get stronger.
“You see, if you look at what has happened since the forex unification, you discover that people are now bringing in their money into the economy. So, we have the highest inflow of foreign currency within the last one month and highest since the last 15 years. When a positive policy is made, because of the knowledge gap, people will not understand that there is a gestation cycle in policy implementation and policy actualisation. When a policy is made, it will take sometimes, six months and sometimes eight months, one year and sometimes two years for the effect to come; it continues to fluctuate until it hits a ceiling, then it will begin to come down and then we will come back to status quo,” he explained.
The deregulation of PMS is in line with the provisions of the Pteroleum Industry Act (PIA) 2021.
