Analysts, Operators Back Change in Fuel Price Regime

The bold move by the federal government in announcing the complete cancellation of the fuel subsidy regime has received the backing of financial market analysts.

Speaking in separate interviews with THISDAY on the sidelines of the ongoing World Economic Forum (WEF) on Africa holding in Kigali, Rwanda, the experts noted that ending the problematic fuel subsidy regime would help improve public finance in Nigeria and also remove uncertainty about sustaining the fuel subsidy regime.

To the Managing Director/Chief Economist Africa, Standard Chartered Bank, Razia Khan, there was previously an increasing doubt about the willingness to allow for pricing that would not stall economic growth.
She argued that what became clear with the shortage of fuel experienced in the country in the past few months, was that an attempt to regulate at a much lower price did work.

“What we have effectively seen was that the actual price of fuel in Nigeria was probably a lot higher than the new ceiling that has been put in place. So, this is an opportunity for reform and putting in place reforms that would hopefully increase the supply of fuel, deal with the bottleneck.

“But I think the relevance of this fact goes far beyond the announcement by Nigeria’s government. In terms of trying to show the resolve of the government in terms of what has become a pressing economic issue, it obviously raises the hope that we will see a similar approach being adopted when it comes to other constraints that the economy is facing and other bottlenecks that held back growth.

“So, the very interesting part of this fuel price reform is the idea that oil marketers would get the forex that they need from whatever secondary sources that might be available and they are allowed the leeway to show whatever pricing they need to show subject to a certain ceiling. And that is better than the situation before.
“In terms of of public finance, there wasn’t a clear system in place previously. Now, we are comfortable that Nigeria’s public finance looks to be on a much more sound footing, simply because the uncertainty about the re-emergence of fuel subsidy in the budget seems to have gone away,” Khan added.

Also, in his reaction, the Chief Executive Officer of the Nigerian Economic Summit Group (NESG), Mr. ‘Laoye Jaiyeola, pointed out that through out the transition programme, the federal government made it clear that it was going to take some though decision, just as hd welcomed the decision to end the subsidy regime.

“I am happy that it is better late than never. We hope to see that as the beginning of a wholesome reform in that sector. Also, we expect clarity on the Petroleum Industry Bill (PIB).
“So, we support the government on that idea and members of the labour movement should please, I am appealing to labour, not to deceive ourselves, because Nigerians have been paying higher for fuel. Let us see what happened in the diesel sector in the petroleum sector.

In the short-run, price would go up because we would scramble for the product, but as more people get into the sector, it would go down. So, I appeal to labour to bear with us because what government is concerned about is alleviating the suffering of the people,” the NESG boss said.

Jaiyeola also stressed the need for the federal government to “take on the issue of the forex market boldly’” saying that the current forex regime is not sustainable because jobs had been lost a lot of factories shut down.
“So we need to look at our forex policy. We talk about the demand side, what about tted supply side? Are we not shutting out people from bringing money to this market?,” he asked.

Also, the Senior Partner and Managing Director, Boston Consulting Group ( BCG), a professional services firm which recently opened its Lagos office, Mr. Luis Gravito, said he recieved the news about ending the subsidy regime in Nigeria with happiness, adding that it was clearly in the right direction.

“In the short-term, it is obviously a burden for the population, because prices would go up. But actually, without a pricing system that actually reflects cost in an efficient way, the correct allocation of resources is not possible. The best signaling mechanism to allocate resources in any economy is a transparent pricing system and prices needs to reflect cost for capital to make profit.

So, in that respect we think it is clearly a step in the right direction and again it will enable a much healthier growth in the economy and therefore if that happens, you can transfer that to the well being of the people,” he added.
However, in a note on the policy pronouncement to THISDAY, an economist at London-based Exotix Partners LLP, Alan Cameron, opined that it wasn’t 100 per cent clear whether the subsidy has been totally removed or whether a new cap has simply been introduced.

“Either way, it does look like the government is moving towards a more market-oriented form of pricing, which is a good thing. The big question is whether petroleum marketers will not be made to source from the black market, which (we think) would roughly double the supply of US dollars at the official rate for everyone else,” he said.

But Lagos-based CSL Stockbrokers Limited, in a report yesterday, stated that allowing fuel importers to access forex on the parallel market will lead to a surge in demand on the parallel market, which will likely lead to a depreciation of the greenback on the parallel market.

“The increase will add to inflationary pressures at a time when inflation has already been heading rapidly higher. Headline inflation registered 12.8 per cent year-on-year in March up from 9.6 per cent in January and higher fuel prices will likely add to the upward pressure. Granted, if the move leads to increased supply of fuel, there will be a reduction in costs associated with fuels queues and shortages, but we do not think that this will offset the price increase.

“Overall we refrain from labelling these moves as deregulation because the price of fuel is still regulated. In our opinion, what is required to get the economy back onto its feet is full deregulation of both the fuel market and the foreign exchange market,” the CSL report stated.
Meanwhile, the naira slipped marginally as at mid-day to N324 to a dollar yesterday, from N323 to a dollar on Tuesday.