Business News

Is PMS subsidy back?

With the NNPC Ltd confirming it’s the only importer of PMS into Nigeria and the retail local price of PMS locked in place even as the price of Brent Crude rises, it’s now clear the PMS subsidy is back

The local Nigerian retail price of PMS at the fuel pump is based on the international price of crude oil, priced in USD.

As of May 28th, the international crude oil price was about $71, but the Naira exchange rate to the United States Dollar was pegged at below Five Hundred Naira by the Central Bank of Nigeria.

Thus when the subsidy was removed on PMS and the dollar, NNPC’s retail price reflected the new dollar to naira exchange rate that was above five hundred naira, thus local pump prices rose

Today PMS subsidy is back, the subsidy is still borne by the NNPC Ltd but the dollar to Naira exchange rate is now above $1,000 and Brent Crude oil prices are near $100, thus the NNPC Ltd subsidy can’t take the local price of PMS lower or to May 29th prices because the main cost component of local PMS pricing is the exchange rate not where the crude oil is refined (I.e. refinery)

Thus if the Dangote and NNPC Ltd refineries start working today but international oil prices rise above $100 and dollar to naira exchange rate falls to say $1 equals N1,400 then the local PMS price will rise.

As long as crude oil is priced in USD $, the subsidy on local retail PMS will never vanish unless the Naira gains strength on the $

Why can’t we sell oil to our refineries in Naira? Well because the cost of anything is the opportunity forgone. Thus, the cost of selling crude oil in Naira is the opportunity cost of losing $ revenue

Now the bad news, US Fed rates (and thus the $ strength) are expected to stay up, meaning the Naira will come under selling pressure.

The economic team needs to get innovative

Either it finds a way to get cheap $ to NNPC to refine or swap or it enters into a barter trade for a commodity priced in Naira, exported from Nigeria but needed abroad.

Normally this would be a nonoil commodity but the total trade number for nonoil exports is weak and largely insignificant.

Another area is remittances, can the NNPC sell “PMS notes” to the diaspora to finance the PMS imports and allow those notes to be converted to naira locally at no cost?

The economic team will have to get creative

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