The cost of petrol is expected to further rise as much as N700 per liter in northern Nigeria, and around N610 in the south from July, The Punch reports, quoting the National Controller Operations, Independent Petroleum Marketers Association of Nigeria, Mike Osatuyi.
“What I am seeing is around N600 and above, depending on the exchange rate, the current crude price at the international market, and the landing cost. Those in Lagos will pay around N600, those outside Lagos around N600 plus, while those in the north would be paying anything from N700 and above,” he said.
The projected prices are based on the realities of the Nigerian forex market, which has seen the naira plummet to N770 against the dollar in the Investor and Exporter window. The last petrol stock of the Nigerian National Petroleum Company Limited is reportedly finished.
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The forex market, which was floated earlier this month by the Central Bank of Nigeria (CBN), has impacted the cost of nearly all goods and services – especially petroleum products. Further hike in petrol prices means that the resulting economic hardship will be exacerbated.
Analysts have projected that the new forex and subsidy policies will stoke inflation (currently at 22.41%) up to 30% in the short term.
Before now, the hope of an adequate supply of affordable Premium Motor Spirit (PMS) hung largely on Dangote Refinery, whose products are expected to hit the market by July. Dangote Refinery, with the world’s largest production capacity of 650,000 barrels per day, was commissioned last month in Lekki, Lagos. But it is understood to be functioning at around 88% – slimming the hope of a quick cheaper PMS in the Nigerian market.
Experts said that the deregulation of the upstream and downstream sectors means that hence, market forces will determine the cost of petroleum products. This includes the federal government’s fresh move – imposing 7.5% VAT on diesel imports.
Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) said market competition will help drive the prices down in the long term. The agency said it has been issuing import licenses to companies interested in bringing in PMS, a move that will encourage competition.
The Executive Secretary, Depot and Petroleum Products Marketers Association of Nigeria, Olufemi Adewole, told The Punch on Tuesday that however, prices will be determined by market fundamentals.
“Prices of products will depend on market fundamentals, and as we speak, the Nigeria Customs Service is delaying some AGO (diesel) vessels because of the 7.5 percent VAT.
“And don’t forget, any cost incurred by marketers would be added to landing cost, and then to the pump price. The marketer would also have to add profit because they must make profit,” he said.
The odds stark against the FX market
There is hope that the CBN will soon stabilize the FX market through interventions. The apex bank said earlier this month that the FX market floatation is a managed one, which means that the exchange rates will not be fully determined by the market for now.
But having reached as high as N770.38 /$1 earlier in June, and hovering now around N756 – to N765/$1, it is not clear at what rate the CBN intervention will cause the market to converge.
Analysts believe the answer to stable FX rates is largely tied to adequate forex liquidity. But Nigeria has been struggling to find buyers for its crude oil, its major source of forex, in the past months.
The federal government’s recent faceoff with shipping companies over unpaid taxes from 2010 to 2019, has caused some vessel owners to shed loading oil from Nigeria – leading to a surplus of stranded oil from the country, according to a recent Bloomberg report. The report noted that the country is still looking for buyers for about half of its July loading.
Although the Federal Inland Revenue Service (FIRS) has granted shipping companies a six-month grace window to clear the retroactive taxes, the challenge remains. According to the report, about 20-22 cargoes worth of barrels, totaling about a million barrels, have remained unsold for July.
This, besides scuttling Nigeria’s chance to boost its foreign reserve from the dollar derived from the sales of oil, has bolstered shipping costs for Nigerian oil significantly. Nigeria’s daily shipping cost has risen to $53,463, above the year-to-date average, according to data from the Baltic Exchange.
The economic impact widens
The crippling effect of high FX rates on PMS prices is notable for the drastic reduction of vehicles on Nigerian roads. For instance, Lagos, which has approximately 2.5 million cars on its roads daily, has over the past weeks, seen the number drastically reduced.
Against this backdrop, there are growing concerns that if not urgently addressed; the situation will squeeze off what is left of Nigerians’ meager spending power.
The World Bank said in its June 2023 edition of the Nigeria Development Update (NDU), titled ‘Seizing the Opportunity,’ that more than four million Nigerians have fallen into poverty during the first six months of this year.
The report, which attributed the situation to the challenges posed by forex reforms, warns that an additional 7.1 million individuals could fall into multidimensional poverty if immediate steps are not taken to protect Nigerian households from the initial price shocks resulting from the petrol subsidy reform.
The World Bank said it has approved an $800 million loan for the Nigerian government to facilitate palliative measures, including cash transfers to poor Nigerians, to cushion the effects of the FX and subsidy reforms. But the $800 million is believed to be too meager to ameliorate the widespread impact of the reforms.
The Nigerian government is currently working with Civil Society Organizations to create a framework for a reviewed minimum wage that will boost the spending power of Nigerians. Economists believe that a sustainable minimum wage will help Nigerians to cope as the inflationary shocks of the policies take a toll in the short term.