The decision by Petroleum Products Pricing Regulatory Agency (PPPRA) to remove the price cap on petrol and allow oil marketers sell at a price they desire looks set to be undermined by the challenge of Nigeria’s multiple exchange rate.
Following the restructure in Nigeria’s downstream oil industry, PPPRA’s Executive Secretary, Abdulkadir Saidu announced the price of PMS would be determined by market forces henceforth.
The new regulation by PPPRA suggests all marketers can import PMS and are now at liberty to determine the pump price of petrol without any sanction by a government agency.
However, for most oil marketers, Nigeria cannot fully have a deregulated downstream market if there are still multiple exchange rates and windows in Nigeria which creates a lot of distortion in prices, hurts businesses and encourages corruption as it is susceptible to manipulation.
“A major hurdle oil marketers have to cross is lack of FX liquidity. Given the recovery in oil prices in recent days, and the FX rate in the more liquid parallel transfer market, it might be unprofitable for marketers to import and retail PMS at current price (N121.50 – N125) by Q3 2020,” Omotola Abimbola, an industry analyst at Chapel hill said.
Abimbola noted that if the NNPC continues to import based on the official FX rate of N360, marketers may continue to rely on NNPC for supply, except the CBN creates a special window for oil marketers to obtain FX at the same rate (back to FX subsidy?).
Nigeria maintained a plethora of exchange rates or “windows” with the official rate at N306, whereas the rate on the Importers and Exporters (I&E) window was seen by investors and business leaders as the more independent.
There was an adjustment to the exchange rate two months ago when the monetary authorities moved the official rate to N360 to the US dollar.
“There is a need for clarity on what exchange rate applies. Will oil marketers have the same access to exchange rate as NNPC? If no, then the NNPC will continue to be the country’s sole importer of petrol,” Yinka Ademuwagun, an analyst at United Capital tweeted.
Nigeria’s Federal Government bowed to long-standing pressure to restructure the oil sector and remove subsidy after the country was hit by lower oil prices which have put pressure on its reserves.
With approval by President Muhammadu Buhari, the PPPRA announced that the deregulation has been backed by law and thus, issued new regulations titled: Premium Motor Spirit Market-Based Pricing Regime Regulation, 2020.
“The price cap per lire in respect to Premium Motor Spirit (PMS) is removed from the commencement of these regulations,” said in a template seen by BusinessDay.
Over the years, international firms have pulled out of Nigeria’s downstream sector as government control crimps margins and takes away the shine from a once buoyant industry.
“Eliminating the long-standing fuel subsidy albatross once and for all, will release the much-needed cash to fund infrastructure development in the country, attract new investments to the sector, foster competition between operators, and promote efficiency in the entire value chain,” KPMG, a multinational professional services network, and one of the Big Four accounting organizations said.
