IBADAN, Nigeria (VOICE OF NAIJA) – A Nigerian journalist Mayowa Tijani has shed light on the questions in the mind of many Nigerians after President Bola Tinubu announced the removal of fuel subsidy.
He took to his Twitter to attempt an answer based on the economics of fuel subsidies and the politics of the nation, Nigeria.
He tweeted: “For 46 years, Nigeria paid subsidy on petrol. On May 29, 2023, President Bola Tinubu declared an end to it. What does this mean for the naira & fuel pump price? I analysed existing data & predict that the new price will be N296 per Ltr or N415 per Ltr. I can explain.
“Why two prices? Which one is it going to be? But we now buy for N450/N500 per litre? Will Dangote refinery make any difference? How does any of these affect the naira?
“I reckon these are your immediate questions. So let’s take it one after the other.
“Two major components make up the petrol pump price: landing cost and distribution cost. Nigeria has (almost) no control over much of the landing cost, this is dictated by cost of refined petrol on the international market and cost of transport from Europe to West Africa (Nigeria).
“The distribution cost covers for marketers and retailers profits, administrative charges, transport cost from Port to station, and some other smaller cost elements.
“The last Petroleum Products Pricing Regulatory Agency (PPPRA) pricing template gives us insight into the actual cost of a litre of petrol. Based on a 2021 template, the landing cost of petrol was N189.61/L and the distribution cost was N23, bringing the total price to N212.61/L.
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“FG paid subsidy so we could buy N212.61 fuel for N165. At the time, one metric ton of petrol was $561.96. Today, the price hovers between $680 and $750. I’d save you the maths, but this should conservatively bring the new landing cost per litre to N266 per litre from N189.61.
“Adjusting for inflation and in line with historical data changes, distribution cost is expected to have moved from N23/L in 2021/2022 to anywhere between N30 and N35 per litre.
Landing cost = N266
Distribution cost = N30
Total cost = N296 per litre.
“This is the minimum band.
“All of this is based on the assumption that $1 is N403.80. This brings us to the naira question: What did Tinubu mean by “unifying the exchange rate?” How much will $1 sell for at the official market? Any guesses?
“Tinubu speech suggests that no one will get $1 for 404, while another gets it for N461, and another gets the same for N770, which is fair. But fair has consequences; the first of which may be the pump price of petrol. The rate changes our calculation totally.
“Bloomberg had previously reported an expected 15% to 20% devaluation, which will put the naira around N530 to N550 at the official market. Others are suggesting N600 per dollar if any real unification of exchange rates will be achieved.
“I gave room for a 40% devaluation of the naira (from 403.8) to N565. Factoring that change, the new pump price will move from N296 minimum band to N415 per litre. All things being equal, we should not have any pump price near N500 or N600 per litre. If marketers are being fair”
He went further to ask if Tinubu Admin will push for a devaluation of the naira to as much as N550 on the official side?
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“What difference will the Dangote Refinery make in all of these?”
According to Tijani, Dangote refinery will make a change. But maybe not the pump price of petrol. The first sure thing we can count on Dangote for is support for a reasonable foreign exchange policy.
According to the Central Bank of Nigeria (CBN) figures, Nigeria spends almost $7 billion every year importing petrol, this totaled $36.3 billion in five short years.
“That $7 billion in foreign exchange could be reduced to zero dollars per year — if Dangote Refinery agrees to be paid in naira. This will ease up pressure on the local currency. But will this be the case seeing Dangote took some dollar-denominated loans to fund the refinery?
“The second benefit we can claim is freight cost. According to PPPRA, it cost Nigeria $22 to import one metric ton of refined oil from Europe to Nigeria. This translates to about N7 for every litre of petrol. With us buying refined petrol from Ibeju Lekki, that cost could go to near zero, further reducing pump price.
“I generally recommend that we wait for clearer policy direction from the Tinubu administration, and for Dangote Refinery to sell its first litre of petrol, before we make final conclusions. I hope this helped.”