New fuel price: CBN under pressure to adjust Forex policy

*Central Bank of Nigeria.

*Central Bank of Nigeria.

15 May 2016, Lagos — At the backdrop of the new fuel price pricing template announced by the Petroleum Products Pricing and Regulatory Agency, PPPRA, last week, the Central Bank of Nigeria, CBN, may be forced to review its foreign exchange policy to stimulate the supply of foreign exchange.

Already members of the Monetary Policy Committee, MPC, the policy-making organ of the apex bank, are said to be preparing their submissions along this line ahead of the upcoming meeting of the Committee in Abuja.

It was gathered that discussions would centre around liberalisation of the market to allow foreign inflows while improving supplies to Bureau de Changes. It would also work on measures to stimulate the participation of upstream oil companies in the interbank foreign exchange market. However, it was learnt that official devaluation of the local currency may be inevitably adopted at the MPC as the only feasible way of attracting inflows.

The government had based its costing for the new price on the parallel market exchange rate of N285/ USD1.0 as against CBN’s official rate of N198/ USD1.0. But the parallel market rate which was about N323/USD1.0 as at Wednesday when the new fuel pricing template was authorised, surged to between N360 and N370/ USD1.0, showing an upper band increment of 12.7%, rendering the pricing template negative barely 48 hours after the new pricing policy was introduced.

Foreign exchange dealers said that as demand pressure amidst scarcity persists in the foreign exchange market, rates will spike further this week, worsening the landing cost of fuel on the current pricing template.

At the new parallel market exchange rate, analysts have put the estimated marginal cost (with marketers’ and other margins constant) at approximately 18 percent, which yields a pump price of N171/ litre. Already market analysts and oil marketers have started complaining that the new pricing regime would need some additional policy measures to make it attractive to private sector otherwise it would be left to government to continue to take the losses arising from foreign exchange risks.

Commenting on the situation, last weekend, analysts at Cowry Asset Management Limited, a Lagos-based investment house, said: “We advise the government to deregulate the foreign exchange market so as to create liquidity for funding of petroleum products import. “Without deregulation, shortage of foreign exchange would frustrate the objectives of the petroleum downstream deregulation. “When the demand for funding of oil imports is transferred to the shallow parallel market, the exchange rate in that market segment would likely worsen with the attendant increase in landing cost of products.

“Even at a higher exchange rate, the parallel market would still not be able to fund demand for refined products. This could lead to worsening of the supply bottleneck” Also, in its review of the developments since the new fuel pricing regime came into force, analysts at Afrinvest West Africa, another Lagos-based investment house, said: “There are limitations to the policy shifts.

“Since domestic prices reflect impacts of exchange rate and crude oil price movements, fixed landing cost and distribution margin set in the current pricing template may be inadequate to ensure a stable margin for industry players, thus constituting a business risk for marketers.

“The Minister of Petroleum did mention that the pricing guideline is at the initial stage of the deregulation process and ultimately allow market dynamics to set in. “We believe that the ultimate conclusion of the reform and pricing dynamics such as exchange rate and crude oil prices, ought to be left for market forces to determine.

“More importantly, policy inflexibility of foreign exchange market still constitute a burden to importers and tacit approval granted to marketers to source foreign exchange at secondary markets could pressure exchange rate further at the parallel market.

“We think that the recent effort should be complimented with an exchange rate liberalisation policy, hence, we anticipate a major move on foreign exchange by the CBN this month”.

In its own impact analysis of the change in fuel pricing model, analysts at Vetiva Capital Markets Limited stated, “whilst the liberalisation of the market is a positive development and big step toward full deregulation of the sector, we express worries about the current foreign exchange framework undermining this effort.

“We recall that on average, foreign exchange demand for fuel imports account for about 30% of weekly sales at the interbank market. Our sense is that due to a shortage of US Dollar receipts, the CBN, through commercial banks, may no longer be willing to continue fully funding fuel imports via the official window. “The question we now ask is can autonomous sources sufficiently meet the significant foreign exchange demand for fuel imports?

“We are aware of the arrangement between Majors and related upstream companies but anticipate that as other independents enter the market, the currency could come under pressure outside of the official window and expect the premium between both markets to further widen.

“In our view, if foreign exchange availability had been the major hindrance in fuel importation up until this point, without a requisite adjustment in the current foreign exchange framework, it is unclear how this new structure will sufficiently eliminate fuel queues at retail stations across the country.

“Based on this, we expect the CBN to roll out new foreign exchange guidelines soon”. Sunday Vanguard investigations showed that already a few filling stations in Lagos have started selling at about N150/ litre, N5.0 markup on the new pump price while those outside Lagos were selling far above the recommended price. One of them said they would not be making profit at the N145/ litre if they were to import the fuel directly, but when reminded that the product he was selling was imported by the Nigerian National Petroleum Corporation, NNPC, and sold to the marketers at the old price, he claimed they were preparing to source foreign exchange at the parallel market rate to import except if the NNPC would continue to subsidise the imports.

As at weekend, oil marketers indicated that foreign exchange sourcing would remain problematic in realising the objective of the price increase which was to secure the involvement of private sector in importing and supplying products to ease scarcity across the country.

But an official of the NNPC said the pricing template would be reviewed quarterly to reflect market realities, but declined to say if it would go up or down. According to him, “it is difficult to say if it will go up or down because it would be determined by market circumstances at the time of the review”.

He added that government would be watching the developments in the days ahead to see where there are new problems and determine the best way to address such problems. He ruled out a possibility of the government subsidising the cost differentials arising from imported costs such as foreign exchange market and international oil price, saying that NNPC can no longer afford it.

His position apparently aligns with the 2016 Budget and the figures reeled out by the Minister of State for Petroleum, Dr Ibe Kachikwu, last week. According to the minister, N13.7/litre was being paid as subsidy claims before the recent price adjustments, which translates to N16.4 billion monthly, indicating that retaining the previous price would imply extra-budgetary expenditure would be made since the recently signed budget does not make provision for oil subsidy.
*Emeka Anaeto – Vanguard

About the Author