March 19, 2020 /02:43 AM / by CSL Research / Header Image
Credit: Eagles Blog
The presidency yesterday announced a reduction in the price of Premium Motor Spirit (PMS) to N125 from the current price of N145, necessitated by the fall in crude oil prices. Brent crude oil prices have fallen by c.64% since the beginning of the year, implying a reduction in the landing cost of PMS. The pricing template puts the total landing cost for a litre of petrol at Nigerian port at N137/litre as of February 12, 2020 when brent crude price stood at US$55.79/bb. This has however declined to N64.33/L as of 16 March 2020 following the dip in crude oil price to US$30/bbl.
The decision has been lauded by many as a signal towards deregulation of the downstream sector. While we see the rationale behind the move, we are concerned that the government is giving up an opportunity to prop up its already slumped revenue prospect given the significant drop in crude price. That said, the decrease will likely ease inflationary pressures at a time when inflation is on the rise. Headline inflation stood at 12.2% y/y in February, up from 12.13% in January.
On May 11, 2016, petrol pump prices were hiked by around 68% from N87/litre to N145/litre and many assumed this signaled a full deregulation. This wasn't the case however as the subsidy regime was still in place. The exchange rate factored into the landed cost of fuel was between N280 and N285/US$1. A steep devaluation in the currency and an increase in crude prices in the international market, implied an increase in the landing cost which necessitated the continuation of the subsidy regime, though now booked as under-recovery losses in the books of NNPC.
The removal of the subsidy is a critical free-market reform, in our view, and we believe it is beneficial to the economy and government finances, though it will almost certainly put pressure on consumers and small businesses. Beyond the impact on government revenues, the removal of the subsidy also removes disincentives to refine petroleum product, and may improve the balance of payments through import substitution. We however refrain from labeling this price reduction move as any sign of deregulation as the price of fuel is likely to remain regulated in our view.