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DEREGULATION MUST SAVE NIGERIA TRILLIONS IN SUBSIDY WASTE

SYLVA MAKES THE CASE FOR DEREGULATION  

A virtue signalling Minister of State for Petroleum Resources Chief Timipre Sylva in a statement recently released in Abuja was at pains to point out the economic benefits of deregulation of the downstream oil sector . The main thrust of his statement re-iterates arguments some of us having been making for years. Proper investment will only come to the downstream oil sector when the market has fully deregulated.

The Minister of State goes on to point out the removal of subsidy will save Nigeria trillions of naira, but many Nigerians do not see the 'savings' being used to alliviate their suffering. In a country that budgets more for its legislature than the budget for both education and healthcare  combined it is easy to understand  Nigerians scepticism.

The economic case for deregulation under normal circumstances is beyond debate and it should have come far sooner ,and not just as a consequence of a profligate government that has systematically impoverished the economy with disastrous policy decision making.

The Minister's statement confusingly  provided a definition of deregulation  that seems muddled

"Deregulation means that the Government will no longer continue to be the main supplier of Petroleum Products, but will encourage the private sector to take over the role of supplying Petroleum Products,"

Yet according to the GMD of NNPC Mallam Mele Kyari, the constitutional responsibility and the provisions in law stipulate that it is NNPC that must guarantee energy sufficiency for the country. A fact he re-iterated when charging the newly reconstituted Board of the Petroleum Products Marketing Company (PPMC) to sustain all-season availability of products across the country.

What he was really trying to say  however unpalatable, was that the Nigerian people would henceforth be exposed to the full price of gasoline as a necessary measure to save the economy. He further  went on to say,

" We can no longer avoid the inevitable and expect the impossible to continue. There was no time government promised to reduce Pump Price and keep it permanently low…"

And with that blythe statement, the Minister of State repudiated a long held policy position of the current administration and a tacit agreement with the Nigerian people. Yet this will create real pain, borne almost exclusively and entirely disproportionately by the poor. In many respects deregulation is analogous to treatment for a chronic malady. The difference being that civil society have very little confidence in the government's sincerity in providing a cure for the ailment and their recalcitrance is entirely predictable. Civil society is deeply suspicious of a political-economic class that has consistently mismanaged Nigeria's resource endowment for their  own benefit and to the detriment of the totality of the country's poor. Put simply Nigerians do not trust the government to use the proceeds of any savings to improve their lives.

The position of the General secretary of The Non-Academic Staff Union of Educational and Associated Institutions (NASU), Peters Adeyemi, is fairly representative of stakeholders in Nigeria who are demanding the policy be immediately abolished. Like most opponents of deregulation he points to the onerous burden it places on the poor, especially at a time the COVID-19 pandemic is eviscerating peoples livelihoods. But the fact is the country is broke and neither the IMF or the World Bank are prepared to lend Nigeria any money unless it complies with their policy stipulations. Specifically the deregulation of the downstream sector , the removal of subsidy and the reform of the foreign exchange rate mechanism.

Whilst the reform of the exchange rate mechanism is critical, if not desirable , it creates complex ramifications. The devaluation of the naira has meant all imports will increase in price and whilst economic debate might exist as to the extent any benefit devaluation might accrue to the economy, there certainly can be no argument that the naira needs to have a single exchange rate. In fact the establishmentofa single rate for foreign exchange transactions is a condition precedent for proper deregulation.

Deregulation of the sector should mean that market forces alone set the price of the product. This would entail the participation of numerous sellers and buyers in a well supplied market exercising the irindividual choice. It is crucial that the market is not structured in such a way as to provide a guaranteed return (margin) to the Marketer, there must be risk as in any business. The Marketer's efficiency should drive profitability, not some flawed PPPRA template concocted by its Executive Secretary. These so called templates are the antithesis of deregulation, are often imperfect and militate against the consumer obtaining the best price.

In such a market the role of NNPC would be to act as a swing supplier, utilising and expanding its own NNPC Retail franchise network. That way NNPC and the Government would help set and maintain the fair and equitable market price in a competitive fashion.

To many Nigerians deregulation comes with apprehension, it has been interpreted as a prelude to Marketers creating cartels and exploiting the Nigerian people through overcharging and market distorting practices . In a commodity market with fungible products, choice creates downward pressure on prices as consumers exercise their purchasing power. Deregulation should be a race to the bottom in terms of price if executed properly. The role of the regulator should be solely that of setting the market rules which provide protection for consumers and censoring actors that indulge in market distorting behaviour ; but not setting prices.

Clever Marketers should set up trading desks which employ the plethora of available hedging instruments to better manage price exposure and mitigate risk. If NNPC were a commercially minded and responsible actor they would have heeded our advice on this matter years ago. There is also the question of the usurious cost of funds charged by banks distorting prices which the Government needs to urgently address.

Though the NNPC Chief, Mallam Mele Kyari purports to be oblivious of how much petrol (PMS) Nigeria actually consumes daily, deregulation means that any imported volumes will no longer be used to create an arbitrage opportunity for smugglers and effectively put a halt to Nigeria subsidising neighbouring country's PMS consumption. So it is reasonable to expect the overall amount of gasoline imported into the country to drop sharply. Plugging that alone alone provides tangible savings for the country as it stems the tide of trillions of naira seeping through the country's porous borders

Femi Ogunkolati


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Thursday, 24 June 2021
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