Cost of production skyrockets
Policy makers in a quandary
Manufacturers, Gencos groan
BY BAMIDELE FAMOOFO
For the first time in four years, the increase in price of energy commodities became the major determinant of inflation in Africa’s most populous country. Hitherto, food price movement was a major determinant and contributory factor to the direction and level of inflation in Nigeria.
The National Bureau of Statistics in its inflation report for February released on March 15, 2022 disclosed that inflation which decelerated in January took a new twist as it increased to 15.7 percent.
The major cause for concern is pressure coming from the price of diesel which increased in some parts of the country to N720 per litre, almost doubled and petrol price which has also risen as much as about N250 per litre during the month of February and still continuing.
Bismarck Rewane, Financial Consultant and Chief Executive Officer, Financial Derivatives Company Limited, analyzing the precarious situation caused by skyrocketing energy products in the country said, “Year-on-year core inflation advanced to 14.01 percent from 13.87 percent in January. This mirrored the recent surge in energy-related products, petrol price increased by 51.52 percent to N250/litre in some parts of the country while diesel prices almost doubled (N720/litre.”
Rewane said the situation in the nation’s energy sector appears to have thrown policy makers in a quandary.
The leadership of the country could not deny the claims of Rewane as President Muhammadu Buhari publicly acknowledged that the situation caught his government unawares. It was equally reported that the energy of the seat of government at the Federal level was not spared of the hardship as it had to run on generators to alleviate the suffering at a time.
Meanwhile, key sectors of the economy are feeling the heat as activities in the manufacturing sector are almost comatose. And because the price of aviation fuel is getting out of the reach of the airlines, the price of air tickets has gone haywire.
Experts Speak
Segun Adeleye, international business analyst and President/CEO, World Stage Limited, gave a vivid picture of the situation, describing it as a very big problem.
“We really have big problems in our hands. Don’t forget that the Federal Government has linked the current acute drop in electricity supply which culminated into national grid collapse in recent days to shortage of gas. The problems are interwoven. The aviation sector is also seriously hit, besides over 100% increase in airfare; the airline operators are not sure whether they will still remain in business in a matter of days or weeks,” he lamented.
He noted that the current energy crisis in Nigeria has local and international dimensions and it will not quickly disappear by mere wishful thinking.
“It is a difficult thing ensuring production at this time, as diesel has gone up to N720 and N730 per litre. It is getting extremely difficult to produce and I don’t know how we are going to cope because 70 per cent of industries are running on diesel, there is no light”
His words, “The Russia’s invasion of Ukraine on February 24 has disrupted the global energy supply with oil prices rising to nearly $140 a barrel at one point. This has diverse economic implications for Nigeria. As an oil producing nation, Nigeria should benefit from this price spike, but the country is also limited by its inability to raise output as it would wish due to lack of capacity.
Nigeria is currently producing about 1.4 million barrels per day (mbd) which is even below its 1.8 mbd OPEC quota. Government has blamed lack of investment in the upstream sector over the years for this.”
In the second front, he continued, “Nigeria is importing up to 95% of refined petroleum products to meet its domestic consumption. So what this implies is that the country is paying a higher price for the rising crude oil price in the international market with the expensive fuel it has to import. From the recent count, the landing cost of premium motor spirit (PMS) or petrol was put at over N400 a litre, and for the fuel to be selling at N165 per litre at the gas stations that will be a huge loss.
Who will pick up that balance?”
Adeleye noted that the issue of subsidy is a major problem which Nigeria must confront as he suggested that the estimated N150 billion monthly subsidy which translates to about N1.8trillion annually is not sustainable, considering that total budget for 2022 stands at about N17.126 trillion.
“I see the current energy crisis being prolonged even beyond the tenure of this administration because of the political implications of a practical deregulation of the fuel supply process that will translate into selling fuel at market dictated prices. National election is approaching and I don’t see the Federal Government coming out to say it’s withdrawing fuel subsidy, which will translate to petrol selling for close to N500 per litre. Moreover, as long as the country is import dependent, other unforeseen hitches will continue to disrupt domestic fuel supply like the recent off spec import that sparked off the current lingering fuel scarcity,” he added.
He however expressed hope that the coming on board of the Dangote Refinery sometime in the third quarter of 2022 will bring some succor to the people of Nigeria though not in the short term.
“Nigeria’s petroleum consumption as at December 2021 was put at 587,000 barrels per day (bpd), so the Dangote Refinery with 650,000bpd capacity should be able to meet local demand with some left for export. However, it will not instantly translate to cheap fuel, because the company will be sourcing its crude at prevailing international prices. But, at least some of the hitches from importing processes will be eliminated and the country will save huge foreign exchange, over $1 billion annually from fuel import, which can be channeled into other sectors of the economy,” he said.
Also speaking, Senator Sheu Sani said the administration of President Muhammadu Buhari has proven to be incompetent and overwhelmed by energy, economic and other crises bedeviling the nation.
The former senator who represented Kaduna Central at the National Assembly, said the Federal Government has been taken “ill economic decisions since the current administration” adding that the results are now starring at Nigerians
Sheu said there is no single functional refinery in the country and that not until that is addressed, the problem would persist.
He said, “It is clear from what we have seen from the energy sector, power sector, and insecurity in the country. It appears that the end of Buhari’s regime has become more chaotic than the beginning of it and we have a duty to address these fundamental issues that affect the lives of all Nigerians.
Right now, the country is on the verge of paralysis and the government has proven unable to address it. It has been recorded in Buhari’s stewardship that Nigerians have never had it so bad.
“Take for instance, the removal of subsidies. We are those, who over the years protested against the removal of subsidy but we have come to the realization that when a government says they have to borrow N3 trillion to subsidise, at least, we should make once and for all decisions in our lifetime.
Nobody should be paid any Kobo; let us address our first reality of fuel price so that we know that this money can be committed to something else. Now, subsidy has not been removed in Nigeria and people are buying diesel and petrol at this exorbitant rate. Still, the minister is still saying we have to borrow. You can see how ill economic decisions have caused and still cause us a lot.
“Now, life has become so miserable, people are suffering and they cannot move from one state to another either because transport has been grounded or because of insecurity. Many failures and factors on the part of President Muhammadu Buhari led administration, especially, have compounded the energy crisis and other sectors. The problem is with the president of the country.”
He dismissed the argument that the crisis might have been caused by the ongoing war between Ukraine and Russia saying “there is no queue in Benin Republic, there is no energy crisis in Cameroon? Or are we closer to Ukraine than those countries do? So, we shouldn’t blame the war on the crisis we are facing.
“Those in the petroleum ministry, headed by President Buhari, why have they not revamped the refinery? An oil refinery is just 30 minutes away from where I stay, it has become a ghost industry.
People are just there doing nothing. Some of these areas have been vandalized by hoodlums. Most of the depots where this fuel is being pumped from Southern part of Nigeria to the North are dormant.
Nobody is working there and grasses have grown over many of the depots. And you ask where the government is? And when you ask them, what you have done since 2015, they will be referring us to Dangote refinery in Lagos. Is Dangote refinery a government refinery? If Dangote can construct a refinery, why can’t the Federal Government construct a refinery?” Sheu queried.
Paul Alaje, a senior economist, while speaking, called on the Federal Government to overhaul the energy sector by making the nation’s refineries functional and also implement workable policies.
He said the country has not shown any seriousness towards tackling the fuel scarcity adding that “we have to find alternatives to our imports dependency of PMS,” before this economic quagmire could be resolved.
The expert said the Ukraine/Russia war has affected the nation’s economic crisis because some items are being imported from these countries and more. “Because of Nigeria’s dependency on imported fuel, it is suffering more collateral damage than the countries (Russia and Ukraine) currently entangled in war.”
According to Alaje, “We have not laid a good policy for which our economy can enjoy. There is no single functional refinery in Nigeria. We don’t appear to be serious as a nation. Nigeria can’t be proud of producing 75cl of refined PMS. We have no plans for the future. We need plans that have been implemented and passed to the legislature. But those in authority are not doing anything to prevent this.
He added the things would only normalise once the Federal Government started showing genuine efforts at turning things around. He said Nigerian currency has been devalued.
“Nigerians should be ready to buy a bag of rice for N40, 000 by December or even before and this is due to the rising cost of diesel. Most industries that produce rice in Nigeria use diesel to power their machines and once they can’t bear the high rates again, they would increase the prices of their products. The impacts on companies would be serious. Many workers would be laid off. Nigerians should be ready for an increase in prices of items. Unemployment will increase because many factories may soon fold up,” Alaje noted.
Manufacturers groan
The Manufacturers Association of Nigeria is seeking urgent intervention from the Federal Government to support the production of goods, as diesel price hits N720 per litre.
Lanre Popoola, the Chairman, Manufacturers Association of Nigeria Oyo, Osun, Ekiti and Ondo branches, stated this while speaking on the increase of prices of petroleum products and lack of power supply.
“It is a difficult thing ensuring production at this time, as diesel has gone up to N720 and N730 per litre. It is getting extremely difficult to produce and I don’t know how we are going to cope because 70 per cent of industries are running on diesel, there is no light. There is no power supply, we are having 30 percent of what it used to be, whereas the disposable income of people is not increasing and the cost of products is going up,” he lamented.
The chairman noted that, if the situation persisted, it could lead to bigger issues that would further affect the nation’s economy and increase the hardship of Nigerians.
“The GenCos have exhausted all their lines of credit. You will remember in 2015 to 2016, the CBN told all the commercial banks not to lend money to the power sector again because we are not good at paying back”
Popoola stated that the way forward was for the government to come in and assist manufacturers, by giving some rebate on diesel, adding that that was the only lifeline.
“Aside manufacturers, for transporters that are bringing food from the North or taking products to the East or Lagos, now the cost of their logistics would have doubled by 100 per cent if not 200 per cent. Maybe the government can come in and do a kind of palliative for us, it is either we have light 24 hours per week, to run our factories or do a palliative on diesel,” he said.
Gencos Kick
Electricity Generation Companies on their part also painted a gloomy picture of the power sector as consumers groan under outages nationwide.
Listed as their major challenges are N1.644 trillion owed them by a federal agency, the Nigerian Bulk Electricity Trading Company, lack of access to credit facilities and absence of a foreign technical partner.
Joy Ogaji, Executive Secretary of the Association of Power Generation Companies, who highlighted the challenges, also said there has not been a subsidy on electricity since the privatization of the power sector in 2013.
Ogaji put the nation’s current electricity generation at 4,000Megawatts and blamed the development on poor management of the power grid.
The APGC spokesperson recalled that power generating plants were doing better when they were managed by a technical expert, Marek Martin.
She, therefore, advised the Federal Government to recall Martin, who according to her, developed tools that enabled the plants to work above average.
Her words, “Recently, you must have heard that Egbin in Lagos lost several units. When Marcel Martin was in Nigeria, he developed tools that were used to manage the grid by both the generation companies and distribution companies.
She also lamented that the GenCos exhausted all their borrowing sources after the Central Bank of Nigeria warned banks against lending to them.
The Executive Secretary noted that were the thermal plants working optimally, the GenCos would produce about 9,000MW.
Asked how many MWs the GenCos could generate if the thermal plants were working optimally, she replied, “If you give us gas, provide FOREX to carry out maintenance. I have told you most of the units are down and money is needed to fix them.
“Give us enough money to pay our gas suppliers because it is prepayment. But for power, it takes and pays later. There is no way that this misalignment will help us.
“The GenCos have exhausted all their lines of credit. You will remember in 2015 to 2016, the CBN told all the commercial banks not to lend money to the power sector again because we are not good at paying back.
“If the government can clear our outstanding debts, give us foreign exchange to maintain our plants, we are ready to generate up to 8,000 to 9,000MW mechanically. That is if transmission and distribution are willing to take.”
On electricity subsidy, she said: “We have not been given any subsidy. I say this because if the government has in the past brought N701billion; N601billion; N213billion, these are all monies geared towards our outstanding invoices.
A bleak future
It would appear that the future is not bright for Nigerians as the Nigerian Electricity Regulatory Commission has confirmed the federal government’s removal of electricity subsidies, adding that the commission will review tariff rates every six months.
Zainab Ahmed, the Minister of Finance, had earlier announced the removal of the electricity tariff subsidy last week.
Sanusi Garba, NERC chairman, said the commission played a role in ensuring that tariff rates were regulated.
“The commission’s role is to determine the rates that consumers should pay. As a result, we strike a balance between consumers and investors,” Garba explained.
He also stated that the electricity subsidy had been reduced over the last four to five years due to its unsustainable nature in terms of investor return on investment
Meanwhile, the CEO of FDC Ltd said he expects inflation to continue its upward trend in the coming months, largely due to cost pressures.
