The inevitability of fuel price increases – Part 2
The pressure from IMF to remove all fuel subsidy and ensure BOP balance is also a key driver of PMS price hikes. In March 2020, the Federal government requested financial assistance under the IMF Rapid Financing Instrument (RFI) to help with balance of payment needs and COVID-19 health expenditures. In the following month, the Executive Board of the IMF approved Nigeria’s request for emergency financial assistance of $ 3.4 billion, under the RFI to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic. IMF loans always come with conditionalities; official and unofficial. In Nigeria, one of those conditionalities has always been the removal of fuel subsidies with fuel price hikes.
Another key driver of the upcoming PMS price increases is the inability of the FGN to honour any agreement with labour unions or Nigerian citizens. In 2020, the Academic Staff Union of Universities (ASUU) embarked on a 9-month strike that ended after many weeks of negotiation with the FGN. However, a few days ago, union leaders stated that the FGN had again failed to honor its “agreement on payment of not only outstanding salaries of members ranging from five to eight months; Earned Academic Allowances (EAA) and check off dues illegally deducted before December 31, 2020.” As of January 2021, Nigerians are still waiting for the FGN to implement the 5 demands of the EndSARS protests that it publicly accepted in October 2020. Despite the agreement between the labour unions and the FGN, electric tariffs and PMS prices were increased before the planned January 25, 2021 meeting. Electric tariffs were increased on January 1, 2021 leading to objections from organized labour and the Nigerian civil society. NERC denied the reported 50% increase and insisted that it had only “adjusted tariffs between N2 per kWh and N4 per kWh”. On Thursday 7 January, the Minister of Power, Sale Mammam, asked NERC to inform all Electricity Distribution Companies to revert to tariffs that were applicable in December 2020. In November 2020, the FGN increased PMS prices to N168/litre despite its agreement with the labour unions to keep prices stable until the January meeting. The labour unions opposed the PMS price hike which forced the FGN to reduce the PMS prices to N162.44/litre.
The IMF import parity pricing model governs the pricing of PMS and forms the basis of the FGN PPPRA PMS price template. The import parity PMS price is the Expected Open Market Price (EOMP). The EOMP is the sum of the benchmark landing cost, the distribution margins, and the taxes. There are no environmental costs or consumption taxes imposed on PMS prices in Nigeria. Therefore, fuel subsidy is assumed to be the difference between the EOMP and the actual PMS price. The logical conclusion of this model is the importation of all refined petroleum products because it allows and presents many opportunities for mismanagement and corruption. The PMS price of N168/litre was decided by the FGN based on the import parity pricing model. So also, was the reduction of the price to N162.44/litre. It is clear, that the PMS market has not been deregulated and that PMS prices are not determined by free market demand and supply forces.
Given all the above key drivers pushing the FGN to increase PMS prices, it is certain that the FGN would increase PMS prices before or after the January 25, 2021 meeting with the labour unions. There is a positive relationship between the price of crude oil and the Cost + Freight price under the import parity pricing model. The higher the crude oil price, the higher the Cost + Freight cost, the landing cost and the final PMS price. Since, all our PMS is imported, the higher the N/$ exchange rate, the higher the final PMS price. Higher PMS prices lead to higher business energy cost, higher transportation costs, higher agricultural input costs, higher residential electric costs, lower productivity, less savings, and lower economic growth. The FGN will impose PMS prices of N180/litre at crude oil prices of $55/bbl and exchange rates of N380/$ and N202/litre at crude oil prices of $60/bbl based on its IMF import parity pricing model. PMS prices of N207/litre and N221/litre could be expected at an exchange rate of N420/$ and crude oil prices of $55/bbl and $60/bbl respectively. Therefore, PMS pricing under the import parity pricing model is not sustainable.
In the long run, future PMS price hikes can only be controlled by building more refineries, using a production cost pricing model and making the nation self-sufficient in PMS production. In the short term, the only mitigating factors against the planned FGN PMS price hikes is the ability of the Nigerian masses to organize and resist these measures. The FGN has a Velvet glove/Iron fist strategy against planned peaceful national strike/protests by the Nigerian citizens/labour. The velvet glove calls for meetings with national leaders of the planned protests where the FGN representatives sign agreements that the FGN has no intention of honoring. However, there is an iron fist inside the velvet glove.
For instance, during the last meeting with FGN, the labour union leaders were threatened with national security if they carried out their strike action. A national security threat against a planned peaceful strike/protest by FGN negotiators means, in plain English, that if the strike/protest proceeds, the iron fist of the FGN will strike multiple hard blows. First, the police will be sent to at
Next, armed thugs will be unleashed upon the peaceful protesters by government officials/local politicians. If the peaceful protesters do not go home, the armed thugs will then be sent on black flag operations to attack/loot small businesses and burn government properties. The FGN then proclaims that the peaceful protest has been hijacked by thugs/looters and national security requires the Armed Forces/Mobile Police to clear the streets with maximum violence. The leaders of the strike/protest are arrested, beaten, brutalized and jailed. The peaceful strike/protest is drowned in blood. Given such a direct threat, couched nicely in the euphemism of national security, national leaders are forced to call off planned peaceful strikes/protests. Leadership of protests/strikes ceases to be centralized/national and become decentralized/local as in the case of the #EndSARS protests. Organized peaceful national protests/wildcat strikes against the upcoming fuel price hikes may have to be decentralized, autonomous, localized, fluid, dynamic, organic mass-based formations to achieve the objectives of a fair price for PMS and sustainable national economic development for Nigerian citizens.
Dr. Agbon, an oil expert writes from Texas, USA.
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