Habu Sadeik Habu Sadeik is an Associate Chartered Accountant (ACA), financial analyst, political Finance, Energy Finance and Power Sector Enthusiast. He wrote about the pros and cons of returning Nigerian economy to the oil subsidy regime and N600/$1 Exchange Rate.
In his critical analysis, he posed tempting questions that beg for economic answers, giving fa ta and figure about the reality of Nigerian economy and the oil subsidy regime and the Foreign Exchange Rate.
The comment section is available for you to add your contributions, kindly read through Sadeik's submission:
Is it possible for the government to return fuel subsidy? N400/litre?
Is it possible to reverse the fx subsidy by pegging to N600/$
This is a question that a lot of non-economics people are asking.
Well, follow me lets take it step-by-step and see if its possible
The beauty about economics is that every decision has a pros and cons.
if you look at the decision and you did not find both the pros and cons, then either you're being bias or you did not understand the situation.
Fuel subsidy to N400/litre?
let's do the economics
PMS is the final output of crude oil, meaning you get PMS from crude oil.
This means the higher the price of crude oil, the higher will be the PMS.
Lets work with numbers and assumption.
Illustratively:
Price of Crude oil is $80/barrel
Exchange rate is N1,600/$
For every barrel of crude oil, it is estimated that you can get 170 litres of different product. This means you can get PMS, Diesel, Kerosene, Asphalt, Coke and other product.
The output of a single barrel of crude oil is 170 litres.
43% of the 170 litres will be solely for PMS.
This means that 43% of the total 170 litres will be 73 litres.
In summary, you get 73 litres of petrol from each barrel of crude.
This is just on an ideal estimate
If the cost of a barrel is $80 then 43% of it is meant for the petrol.
43% of $80 is = $34.4
This means the cost of getting 73 litres from a barrel of crude is $34.4
The cost price of a single PMS litre is ($34.4/73 litres) $0.47
Each litre of PMS is going to cost $0.47.
To confirm, you can also divide the entire cost of the barrel ($80) divided by the expected output (170 litres)
$80/170 litres = $0.47
I did all this computation to arrive at the cost price of petrol. remember this is only cost price
A refinery owner need to factor Opex cost, and profit margin.
If the cost price of Petrol is $0.47 and our exchange rate is N1600/$, then the cost price of petrol in Naira is N752/litre.
The cost price of petrol is N752/litre.
Lets assume the refining cost is N248/litre making it to be N1,000/litre.
Lets say the profit margin is N100/litre.
I used refining cost to accommodate all the landing cost and other expenses applicable.
Total price of PMS to sell to the market will be N1,100/litre.
This is the real market price. willing-buyer willing-seller model.
If government wants to subsidise the price of petrol to N400/litre instead of the original N1,100/litre, then they have to pay for the difference.
How? simple.
N1,100-N400 = N700/Litre is to be subsidised
What is the total consumption of the PMS daily in the country?
This figure shows we consume 42 million litres daily but other data have showed that its not possible based on the number of cars available in the country.
All right, let's be prudent and go with the assumption that Nigeria consumes 30 million litres daily.
This means government need to subsidise 30 millions litres by N700 per each.
30m X N700 = N21 billion daily for subsidy
N21 billion by 30 days = N630 billion monthly
N630 billion monthly by 12 months = N7.5 trillion annually
Government need to spend and average of N7.5 trillion annually to continue subsiding our petrol price with an assumption that we consume 30m litres daily and fx rate of N1600/$ with a crude oil price of $80/barrel.
Any change in those variables will either increase or reduce the subsidy amount.
Look at the budget numbers for the year 2024 below
Now the presidential question goes......
Can you as a President and Commander-in-Chief of the FRN subsidise the Petrol subsidy by incurring additional N7.5 trillion in addition to the budget numbers shown above?
Most people will say yes because they feel it's easy.
I know some will ask me how is it that the previous government is doing it without any wahala?
The answer is simple, previous government got the exchange rate below N300/$ and massive oil earnings in the budget.
I understand it can be a controversial question/issue but the aim here is to bring the analysis for your perusal.
Cons of fuel subsidy = spending N7.5 trillion annually.
Pros of fuel subsidy = low prices of goods and services in the market.
Government wants to Peg exchange rate to N600/$ as CBN rate while the black market rate is N1,600.
What's the implication and analysis?
I will try to be brief and narrow here.
Illustratively,
Assuming you're a manufacturer that imports raw materials for production.
You went to CBN for dollars to import (of course you can only import with dollars)
CBN will give you the dollars at N600/$ and open LC (letter of credit) for you.
LC means CBN will pay the foreign supplier that will provide goods for you directly.
If the supplier, say from UK supplied goods worth $20 million for you as a manufacturer, he will expect CBN to credit his account with $20m
You as a manufacturer will pay CBN N12 billion equivalent of $20m at a FIXED RATE OF N600/$
Simple question is, where will CBN be getting the $20m to settle the LC they open for you?
CBN earns dollars through 4 major ways
1. Oil Export
2. Non-oil Export
3. Diaspora
4. FPI/FDI
Those 4 major sources is what will increase our reserves.
The reserve will be used to settle transactions like $20m mentioned above.
The 4 major sources of earning dollars mentioned above is no longer enough to settle the outstanding liabilities against CBN and this is what CBN called FX BACKLOG.
They keep accumulating LCs, promises and obligations from various entities without settling them because they do not have enough dollars.
Remember on our example above, that manufacturer who wants $20m for his import is going to sell his product in Naira, so he is not going to earn any USD for him to even help CBN.
If CBN keep failing to provide him the dollars at exchange rate of N600/$, what are his options?
Black market or close business? we both know the answer
If he goes to black market at a rate of N1,600/$, rest assured that the price of his goods will also skyrocket.
Bottomline is, you can not be able to fixed an exchange rate without a supporting reserve.
You can do it for 1 month 2 month, by the time you begin to default on your payment, you will regret it.
Now, having read and understand all that, what solutions can you proffer to the government that can ease the difficulties faced by people in the short-term?
We all know the long term solutions but any effective short-term solutions?
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Category: World-News
Tag: Provocative Factors Revealing Why Fuel Price Foreign Exchange Rate May remain High in Nigeria
Written by Author (author)
Published 2/22/2024 11:42:13 AM