The President of the Trade Union Congress (TUC) Festus Osifo, in this interview with THE WHISTLER, spoke on the volatility in the exchange rate market in Nigeria as a result of the federal government’s decision to float the naira in June last year. Osifo, who is also the president of the Petroleum and Natural Gas Senior Association, suggested steps that the government can take to cushion the negative impact of the naira volatility on the price of petroleum products.....KINDLY READ THE FULL STORY HERE▶
What exactly is the actual cause of high pump prices in Nigeria?
The real problem is the naira devaluation. Because if today, the naira was exchanged for even N700 per dollar, PMS would have been selling for less than N500. So, the reason AGO, for example, is selling for N1200 today is because of the naira. So, most of these things are dependent on naira devaluation, and part of my thought then was that when subsidy was removed, you floated the naira at the same time, which is a miscalculated move.
When the government floated the naira, part of the challenge we had then was that the CBN wasn’t properly constituted. No government official knew that the naira would get to N1,600. Their thinking was that the naira would crystallize around N800 to a dollar. But it didn’t. There wasn’t a CBN then as Emefiele was in custody, CBN was in disarray, and so speculators now took over that market, and they speculated till it got to almost N2,000.
If they had allowed the subsidy thing to settle down at the official exchange rate and manage it for one year to constitute a proper CBN before they floated the naira, things would have been different positively.
I can bet you that the naira would have been up to N1,000 today
So, the real challenge is the naira floatation because everything is imported. Everything is dependent on the naira. Even if we produce locally today in Nigeria, that devaluation will still affect us because if you produce locally, you are getting crude from Total Energies, Chevron, and Shell. They are going to sell crude for you at an international price.
And for you to come at that international price to buy, you have to use the naira exchange rate. So, that’s the major problem.
But I think those in government knew as well that that was the major error of the day
By implication, does that mean crude for naira doesn’t change anything?
No, it doesn’t change anything because that crude for naira, if you remember when they announced crude for naira, they also announced that the exchange rate would be pegged to Dangote at N1,500.
If you were doing crude for naira for example and you are pegging the exchange rate at N1,000 to a dollar, and today government says we are selling crude to Dangote but the exchange rate we are going to be using in converting the international crude price of a dollar would be N1,000.
If they announced that (N1,000 to a dollar) today, you are going to see the price of PMS go down to less than N700. Also, the price of AGO will go down to less than N800 immediately once that product hits the market.
But they are still exchanging at the high exchange rate of N1,500, and as such, it will not affect anything.
Are you advising the government to select a special FX rate for the local refineries?
Yes, they’ve already selected. They selected N1,500, which was what was announced. But the challenge is still that N1,500. I believe it’s too high. I believe that if you want to reduce the cost of energy today instead of N1,500 why don’t you bring it down to like N1,000 or a maximum of N1,100. So if you bring it down today to N1,100 with the current price of PMS, there wouldn’t be a subsidy again, but if you leave it at this current rate, things would still be high.
Wouldn’t that mean subsidy, on the other hand? Isn’t that the same thing as subsidizing the crude, which automatically means that Nigeria will also be losing her earnings?
This is about the exchange rate, in the sense that foodstuffs get quoted at the price of the same exchange rate that Nigeria could control. But during late Sanni Abacha’s time, it was at N22 to a dollar, during Obasanjo’s time, it was also managed, the same as late Yar Adua. So, the exchange rate is what we have, The exchange rate is the parameter, the variable that we can easily manage as a country. So, as of today, there are special exchange rates that are being used in different commodities. Therefore, why can’t you apply that exchange rate to crude?
The danger in this is that if, for example, today’s exchange rate is N1,600 and you allow the product to be free market, the product is going to move to somewhere around N1,300 with full deregulation. Also, when the exchange rate moves to N1,800 or N1,900, what is going to happen? The price is going to move to N1,700. In Nigeria today, we are not ready for that kind of pricing. If the government cannot stabilize the exchange rates between N1,000 to N1,300, which they have the tools to effect, if they cannot, they should give a special exchange rate to the energy sector.
But from what you said, isn’t there an existing special exchange rate, which is N1,500?
Yes, but it’s still too high. Let them work it down a bit so that with this current pricing now, it will be fully deregulated. So, if they move the exchange rate to like N1,200 with this pricing in the market now, nobody will pay subsidy again.
But won’t this mean that we will be subsidising the crude, which in turn affects the country’s revenue?
As of today, we are subsidizing, right? As of today, too, they have given a special exchange rate. But in that case, you can be subsidizing production, not consumption.
If you look at different countries in the world, they subsidize production because if you are subsidizing the crude, that crude is what we feed into the Dangote refinery, which is also what we feed into the government-owned refinery when they start production.
This means that you are subsidizing production, which is not that bad compared to when you are subsidizing consumption and that can be easily managed.
So, how do you think this exchange rate volatility can be managed since pump prices go up the moment the exchange rate increases?
It can be done. From what I was informed, if you check, sometimes the narrative has been that governors are receiving more money because of subsidy removal.
But that wasn’t correct. They had more money they were receiving because, as of September last year, NNPCL started subsidizing the product again. So, for almost one year, NNPCL has been subsidizing, which means there is no money free from the subsidy, but the extra money was coming in as a result of devaluation proceeds, not a subsidy.
So, now when they started that re-engineering and it was getting to N1,200, the government started shouting because that would shrink their fund. That was why they left it again to come to around this N1,600. So the government can do it.
You knew what they did last year between July and October. They brought the chief executives of banks to Abuja and mandated all of them that any bid that is more than N798 should be rejected. Any bid that is below should be accepted, and that was why the exchange rate between July and October last year was fairly constant. So, the government can do it, and they can manage the exchange rate. But if they do that today, the funds accruable to them that would be shared in their FAAC meetings would dwindle because the fund is high.
Don’t you think what they earn amounts to nothing because with this big earnings, the purchasing power is being decreased?
The benefit to them is if they are buying a car, the dollar value remains the same right, and so it doesn’t move. If they are buying laptops, you are spending more naira. Let’s say a car before was $100,000 equivalent to N80m, and today is sold at N160m to N170m. The volume is now high that you pay for that car because the dollar value is constant. If you are buying any imported item, it is like that.
But where they benefit is the personnel cost, because over half of their budget goes into personnel costs. So, when you devalue all those costs remain the same vis-a-vis but that personnel cost is where they gain from and that is what they are interested in because some states spend 60 to 70 per cent of their revenue on personnel costs. So that’s the gain that they are having?
