By: Sir Henry Olujimi Boyo (Les Leba) first published in April 2016
Intro:
Last week this column republished Naira Exchange Rate: CBN ‘Don Miss Road’! it discusses the dangers of uncontrolled inflation which is mainly due to government leadership that cares solely about self interest.
(See www.betternaijanow. com for this series and more articles by the Late Sir Henry Boyo)
Today’s republication explains the relationship between rising crude prices, increasing dollar reserves, and Naira depreciation. It draws on examples from the nation’s economic history to point out the continued trend of rising crude prices and what it has meant for the welfare of Nigerians. It further explains how subsidy can be rendered unnecessary when petrol prices fall, even potentially generating a profit!
As you read through the below article taking note of previous events or rates, keep in mind its year of publication (2016), a clear indication that Nigeria’s economic situation is yet to improve even after all this time.
Crude oil prices wobbled alarmingly, well below Nigeria’s modest budget benchmark of $38/ barrel, for several weeks, but unexpectedly flexed above $40 in early April to rekindle hopes that the fortuitous price spiral will be sustained to partly fund the 2016 projected deficit and partially also satisfy the clearly bloated excess market demand for foreign exchange.
Therefore, if by some ‘strange turn’, oil prices further bounce back beyond, for example, $60/ barrel this year, the almost $5bn projected external loan, in the 2016 budget will become unnecessary; consequently, further debt accumulation which already cost us an arm and a leg to service will also become restrained.
Furthermore, increases in dollar income from higher crude prices will also redress the current market scarcity of dollars and supportively provide increasing cover for our import needs, particularly the raw material requirements of the real sector and fuel imports. The recent fuel scarcity which lasted for over eight weeks, has clearly demonstrated that NNPC do not have the capacity to monopolise fuel imports and successfully satisfy market demand.
Regrettably, however, increasing dollar revenue from higher crude prices may not improve the Naira official rate as often popularly expected; indeed, in this regard, we should be reminded that the Naira exchange rate remained almost static around N155=$, even when oil prices exceeded $130/barrel and CBN consolidated more than $60bn as reserves; consequently, it is therefore unlikely that a relatively more modest rise of just $60/ barrel would stimulate the Naira exchange rate.
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Nonetheless, parallel market exchange rates may recede closer again to the official rate, if CBN once more deliberately creates opportunities to liberally allocate dollars to the black market. Conversely, however, both the parallel market and official Naira rates will improve considerably, if CBN can successfully manage Naira supply at the right equilibrium that would significantly reduce the persistent burden of surplus Naira in the money market. Thus, if Naira supply was optimally managed against the prevailing level of productivity by CBN, the local currency would gain more respect and, increasingly become adopted as a stronger store of value by patrons.
However, the official Naira exchange rate will, inexplicably, regrettably, remain static, even if crude prices spike unexpectedly beyond, a ‘fortuitous’ premium price of, say, $200/barrel. Ironically, crude prices at such an extreme level will actually cripple our economy; in this regard, It is useful to remind ourselves that poverty in Nigeria actually deepened steadily as crude prices rose from below $10/barrel to over $140/barrel in recent years; curiously, more Nigerians dropped below the poverty benchmark of $2/ day income when reserves were more bountiful than when reserves were relatively more modest decades ago. Thus, in the light of past experience, we should be wary of any propaganda that our economic challenges will become resolved if only crude prices rise significantly once again, to swell CBN’s dollar reserves.
Ironically, however, higher crude oil prices have always instigated a corresponding rise in the domestic price of fuel to make deregulation of the petroleum downstream sector very unpopular. For example, open market petrol price fell below government regulated price of N87/ litre when crude crashed below the $38/barrel budget benchmark this year; this unusually low oil price invariably also precipitated cheaper open market pump price without any subsidy; in fact, NNPC reported that a net profit of up to N6/litre was actually being generated in place of subsidy. However, as crude oil prices crept gradually above $40/barrel, the open market price of fuel once again exceeded the regulated N87/litre. Indeed, the PPPRA pricing template indicates that the open market price of fuel was about N96/litre on the 14th of April; in this event, a N9/litre subsidy has once again returned on fuel price.
Consequently, if crude oil price unexpectedly also, climbs beyond $60/barrel, for example, the deregulated open market petrol price will invariably approach N130/litre. However, it is unlikely that motorists who were constrained to pay N200/litre during fuel scarcity, may not readily accept N130/litre pump price, without market scarcity. Thus, although, rising crude price is desirable, as it boosts our foreign reserves, it also has the collateral downside of pumping up the domestic price of fuel to make price deregulation very unpopular, and unfortunately also restrain serious interest in the establishment of private refineries.
So, while the sustenance of higher crude prices will improve our capacity to comfortably pay for critical raw materials and fuel imports, the same premium crude oil prices may invariably also instigate higher pump prices to once more accommodate annual subsidy payments of over N2Trillion, or about 30% of the 2016 budget if deregulated pump price approaches N130/litre. So, in such event the level of crude oil prices instructively become a double-edged sword.
However, there is the popular perception that since crude oil is obtained from our own backyard, we are therefore entitled to enjoy cheaper petrol prices. Unfortunately, this expectation is misplaced, because, as we invariably earn much more dollars when crude prices rise, cheaper dollars should be our actual entitlement; furthermore, cheaper dollars should correspondingly translate to a stronger Naira exchange rate. Meanwhile, a stronger Naira exchange rate would actually make fuel prices cheaper, even without subsidy; for example, if the Naira appreciated to say N100=$1, as it should, if crude price and output soar significantly, the open market pump price of fuel will similarly collapse below N50/litre from the erstwhile regulated N87/litre price.
Consequently, although, from the preceding, petrol will become cheaper domestically, the stronger Naira exchange rate will also serve as a clinical deterrent to cross border petrol smuggling; ultimately, Nigeria’s actual daily consumption of petrol will be more correctly determined. Furthermore, up to 20% per litre sales tax can be levied to consolidate over N800m daily while the deregulated pump price will still remain below the current N87/ litre.
However, the most disturbing feature of higher crude prices and bountiful forex reserves is actually in its disenabling impact on the critical monetary indices which necessarily drive inclusive growth in more successful economies. Curiously, the bountiful reserves CBN consolidates from higher crude prices, inexplicably, instigate the distortional economic burden of exceedingly surplus Naira values in the market.
Indeed, CBN has undeniably relentlessly waged unsuccessful battles to reduce the persistent Naira market surplus to avert inflation. Instructively, however, unrestrained excess Naira supply not only inappropriately fuels inflation well beyond best practice rates below 2%, evidently, prevailing high cost of funds above 20% to the real sector, steadily weaker Naira exchange rates and high fuel prices are all products of incurable excess naira supply in the market.
Incidentally, persistent excess Naira supply with its destabilising consequences are primarily instigated when CBN substitutes and prints Naira allocations for dollar denominated revenue.
