N162 PETROL REVELATIONS: How Buhari dumped subsidy regime, by NNPC GMD
…Inside the meetings
…Nigerians better off with total deregulation’
…Says special FX window for fuel importers underway
The Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, gives an insight into the controversial hike in the price of petrol from N145 to N162 per liter. Kyari justifies the hike with insider information. Excerpts:
Petroleum subsidy has been a big issue in this country for the past 20 years. And not only that, every corruption that you are aware of in the downstream sector of this industry is one way or the other connected to fuel subsidy. I can give an example. Several licenses were issued for people to put up refineries across the country but very few people could deliver.
The reason is very simple. People are not sure that when you produce petroleum products, at what price are you going to sell? But if they know that the prices are not market determined and that there will be no element of subsidy, every will try to deliver on this. The end result is that this burden is left to the NNPC.
What that means is that government has to fill that gap. It is understandable that people are angry that prices have gone up just like the price of every commodity, this is a challenge that people naturally face.
But when price goes up the natural thing that must happen is that your income will increase so that you are able to procure the thing that is produced at low price. You can’t do this if there is no productivity. And there will be no productivity if there is no growth in infrastructure and therefore there is a connection between production and consumption. What subsidy does is to fill the gap. So it is necessary to make a decision.
Only Buhari regime can make this decision. And the reason is very simple. People may not appreciate the fact that the lost opportunity is a situation where you have spent enormous resources, over N10trillion, in the last eight, nine years, trying to service subsidy. That also includes the FX resources that are lost.
With all the distortions it creates, the natural reaction is that ‘I don’t want to lose this; I am getting this cheap and because of this distortion I am going to suffer’. This is not true. Subsidy itself, by its very meaning, is an elitist thing and I can share this with you.
It is only the elite who have three or four cars and fill their tanks that are beneficiaries; the common man is not a beneficiary. First, the common man loses in infrastructure, hospitals and schools are not built and ultimately the brunt of the corruption in the downstream sector is transferred to the common man.
Overall, you lose everything and you gain nothing. So, people get angry and this is coming from people who are practically not aware of this situation. They are not aware of their loss and most importantly they are being engineered into making those statements.
We understand this thing very perfectly. We are the national oil company and our role is to ensure that we are able to deliver cost and the cost is lost daily as the price of crude goes up and you are unable to do many things. So the outburst is very understandable but I can also appeal that it is misplaced because Nigerians are not aware of the opportunity lost.
In 2012, we had this same situation. One of the issues then was the trust in government. And many people think subsidy is a scam. Why has it taken this long for government to remove subsidy? It was called under recovery at a point.
The reason it took this long to get to this point is that it took time to persuade Mr. President. Mr. President is a pro-people President. His position is that ordinary people should not suffer by the acts of people in government or bad acts of institutions.
And government is there in the first instance to provide welfare for the people. And this cannot be delivered unless government intervenes. So, there was a very difficult conversation in government on how to move away from this situation from subsidy to a situation of reality where the market will determine prices without hurting the ordinary people. And this was a top conversation with Mr. President until very recently when he was convinced that we should make this move. And the ordinary people may not be aware that they are bearing the brunt of this situation.
And it is clear that today we cannot afford subsidy anymore. Prior to Covid-19, there had been a collapse in the price of crude and resources available to government were coming down and there was no way we could continue to bear the brunt to the tune of N2trillion annually. You can’t give what you don’t have. But more importantly it is obvious that it is the ordinary man deserves basic infrastructures: hospitals, schools and social security. And without resources, you can’t do anything.
You cannot smoke cigarette and expect to still see it the next day. Today we are convinced that we need to shift to this reality, we need to remove the distortions that exist between consumption and what is available. So this is why it took time, it was a very tough and difficult decision for Mr. President but this is the right thing to do to increase activities in the downstream sector of the industry because it will be driven by the private sector, people will be able to build refineries, prices will ultimately go down because when you produce locally, you are able a decline in the price of products.
So, overall, it will lead to businesses coming back, refineries being built by the private sector, money freed for infrastructural development. Ultimately the common man will benefit.
What are you doing to buffer the pains of the common man?
When the price of petrol increases, there are some connections with the prices of other commodities but not very definite. There is a connection between the price of petrol and that of other commodities. But it is not always true.
But what it does is the collateral benefit that it would bring. More jobs will be created because we are able to bring more infrastructures, roads, hospitals, schools, so that the long term benefit is there. What we must understand today is that at current price, in comparable terms, in the sub region and globally, our price is the lowest in the whole world. Why? We are not producing locally. Yes, unfortunately because our refineries are down. But why is it cheaper here? Because of volume.
70% of West African supply and consumption of petrol is from Nigeria. What that means is that you can’t deliver to the market at the price that is cheaper than ours because it is a matter of economy of scale and the stability of our national currency in the region is better. So we can deliver petrol at a price that is lower than others in the region.
So where does that take you? Pains will come but it will be temporary for two reasons. One, we can’t afford subsidy today and two, long term benefit will take care of every pain we see today. People are justified to say we are increasing price but it was the same situation when GSM came until competition crashed price.
What we are saying is that Mr. President can be trusted with the resources that will come from petrol subsidy removal. What happened in the past is that people used this money to smoke and I don’t think anyone will argue that smoking is a good business. And you ultimately lose.
What exchange rate did you use to determine current price?
There are two windows for exchange rate. We are using N390 to the dollar. That is not the window that you have on the street and people have the temptation to refer to that exchange rate. And the rate we use changes every day and we have an advisory from the CBN to make that computation.
So how can the average importer have access to FX when it is obvious that the CBN is rationing FX?
Yes, there are challenges surrounding FX availability but I am aware because I am a member of Mr. President’s economic sustainability team that there are a number of initiatives in place to ensure that FX liquidity increases. FX comes from two sources. One, from the sale of crude and, two, inflow from foreign sources which can be loans and Nigerians who are living outside the country also bring FX. There is even a third window of FX inflow from those who export.
Overall, because the CBN coordinates the inflow and access into FX in the country, we are engaging the industry and the CBN to create a window through which oil marketers will have access to FX. That is not in place today but I can confirm to you that there is an ongoing process and within a very short time, oil marketing companies will have access to FX at the same rate that the CBN will exchange the value of crude and that will take out any distortion in the market so that everyone will deliver petrol to the market at the same exchange rate.
- Interview first aired on ChannelsTV
Written by Kartia Velino