Oil sector deregulation heightens confusion on naira devaluation

Federal Government’s adoption by rule of thumb of N285/$ exchange rate and subsequent capping of petrol price at N145/litre may have heightened confusion on the state of the embattled naira, BusinessDay interactions with industry operators show.

With the official exchange rate at N199/$ and government’s adoption of the rate from the secondary market, without explaining how the Central Bank of Nigeria (CBN) would fund the market, according to analysts, amounts to currency misalignment.

Besides, they see the situation providing arbitrage and round-tripping opportunities thereby encouraging corruption that the government says it wants eliminated.

Last week, in a tacit acknowledgement that the policy is suboptimal, Ibe Kachikwu, minister of state for petroleum resources, announced that government was not using official rates to install a price cap for premium motor spirit or petrol in the recent price hike.

“How did we come to the price of 145? It’s a simple conversion of using foreign exchange at N285. That N285 is from nowhere, it is basically the secondary source that people buy FX from versus the 320, which is black market,” Kachikwu said.

However, experts say it is evidence of an unclear policy, “when you link the price of petrol to the exchange rate, that creates more confusion. How can a government insist that the exchange rate is N200/$ but that you are pricing petrol at N285/1$. Have you devalued the naira, if you have let’s know that,” Atedo Peterside, chairman of Stanbic IBTC plc, said.

Oil marketers who spoke with BusinessDay express worry that oil prices are tied to fluctuations in foreign exchange, and say the policy may run into troubled waters if action is not taken.

“So, what happens when forex goes up, as at yesterday it was N350. Are you telling me that any marketer can bring in product at N350 and still sell at N145? The easily assessable secondary source is the black market,” said a source that operates as an independent oil marketer.

Industry operators in the petroleum downstream sector have warned that Federal Government’s decision to fix exchange rate at a level that cannot support supply may derail deregulation efforts in the sector.

However, another independent marketer who also spoke with BusinessDay said the decision by the government to have marketers source their own forex would help to separate genuine marketers from portfolio companies.

“What stops a marketer from seeking forex outside Nigeria, the government did not ban anybody from getting your forex from banks abroad or other financial or lending institutions, it’s time to get creative and show entrepreneurship by solving the problem rather than being the problem,” he said.

Long years of operating with a control price for petrol has distorted the economy, limiting the capacity of entrepreneurs in the downstream sector to solve practical problems and fuelling corruption where billions of naira are wasted in phantom subsidy payments.

BusinessDay calculations last month based on the assertion of David Setonji, a lawmaker, representing Badagry II Constituency at the Lagos State House of Assembly that a minimum of 50 tankers were being driven out of the country to Benin Republic through Seme border in Badagry, revealed that over N50 billion worth of subsidised petrol was lost to the neighbouring country annually.

A report by Chatham House in 2014 stated that this situation is causing a distortion to economies of Nigeria’s neighbours. “This traffic – locally known as ‘kpayo’ – is almost entirely informal and accounts for the overwhelming bulk of refined fuel sold in the Beninois domestic market, including probably more than 80 per cent of petroleum products as well as 20 per cent of diesel and other products,” the authors of the report, Leena Koni Hoffmann and Paul Melly, said.

Experts warn of dire implications for the economy if the government insists on hanging to a policy that clearly torpedoes all the gains its reforms could bring.

 “People are finding it difficult to pay their suppliers, financial houses are finding it difficult to remit funds, these are evidences of a foreign exchange market that is not liquid,” laments Muda Yusuff, director general of the Lagos Chamber of Commerce.

He states further: “It is not liquid because the exchange rate has been fixed at a level that the supply cannot support. So we have to have a misalignment between the rates and the fundamentals. If we don’t have an alignment, we will continue to have distortions in the economy and that is the major crises we are facing now.”

The impact of the government’s policy on the foreign exchange is seeing flight cancellations, industries laying off workers due to inability to import raw materials, companies failing to meet obligations relating to international trade transactions and scaring off investors who can’t see the logic of bringing their funds into an economy where the bank insists they exchange at a rate far lower than the open market.

Analysts expect the Central Bank at next week’s monetary policy committee meeting to make a pronouncement on the matter.

“We have two major policy issues in this economy, we have the issue with the fuel regulation that has been dealt with partially the second major issue we have in the economy is the exchange rate policy and I hope their next MPC will address this,” said Yusuf.