How a Dollar Will Be N160 in Nigeria: A Blueprint for Economic Resurgence

 How a Dollar Will Be N160 in Nigeria: A Blueprint for Economic Resurgence

By Assoc. Prof. Ahmed Adamu

The recent free fall of the Naira, plummeting from N460 to a staggering N1,600 at the official rate, has cast a dark shadow over Nigeria's economic landscape. With inflation soaring from 22% to 30% within a year, the consequences are dire – exacerbating poverty, fostering frustration, desperation, and fueling a surge in insecurity. The value of the Naira is the economic heartbeat of the nation, impacting the lives of every Nigerian. As the Naira weakens, so does the economic well-being of the average citizen.

In this critical moment, the responsibility to protect and restore the Naira rests not only on the government but on the shoulders of every Nigerian. While the government bears a significant share of the blame, the path to redemption lies in collective action. Drawing inspiration from past experiences in countries like Germany, Zimbabwe, and Venezuela, the key out is straightforward and common. Here's a comprehensive blueprint for restoring the Naira to a value of less than N200 per USD1.

Nigeria should first leverage foreign investment for large-scale agricultural production and solid minerals development. The oil sector is bringing foreign exchange because there is a massive foreign investment in the sector, so also, if we want to grow the Agricultural and Solid mineral sectors, large foreign investment must be injected into the sectors. 

Leasing agricultural fields to foreign investors, particularly for products with global demand, can stimulate economic growth. The federal and state governments must take the lead in the large-scale production of these global cash crops. We have high-potential cash crops that can generate a significant inflow of foreign exchange to Nigeria. 

For example, in 2022, Thailand generated up to $9 billion from exports of Cassava alone. While Nigeria is the largest producer of cassava worldwide, a lack of storage and processing facilities results in the loss of more than 30% of the cassava produced, with the rest being consumed, contributing very little to our export basket.

There's no need to focus only on famous cash crops like Cocoa, Cotton, Ginger, Sesame, and Maize; there are other products like Cassia tora seeds, soybeans, palm oil, and others that also have high global demand. We can allocate a specific target of certain crops for some states, keeping a target export destination and quantity in mind.

Regarding solid minerals, state governments must play a vital role in attracting large investors to exploit the licenses they hold for large-scale mining. They also need to address illegal mining, which drives away legitimate large-scale producers. The mining sector should be standardized, similar to the oil sector. One reason why state governments are not so active in the mining sector is the monthly allocation they receive from the federation, providing no incentive for the development of solid minerals. Allowing states more access to resources and powers and discontinuing or reducing federation allocations could encourage states to maximize the untapped potential in agriculture and solid minerals. 

Another strategy is reducing importation through import substitution to reduce the importation of non-essential goods that can be produced locally so that we can conserve foreign exchange. For example, within just last year's second quarter (three months), we spent N3 trillion importing manufactured goods. Most of this bill could be substituted for locally produced goods or alternative demand. Within these three months, Nigerians spent N734 billion importing used cars. If we can build adequate mass transport systems, the demand for importation of used cars will reduce.

Currency swap is an option too, but in a different way. This type of currency swap arrangement is where Nigeria receives foreign currency at an agreed-upon rate in exchange for access to agricultural and mineral resources, addressing both economic and resource needs. No country will agree to swap its currency for Naira, but many countries will accept swapping currency for agricultural and mineral resources.

Nigerians must stop treating the dollar like a commodity. Purchasing dollars not for any foreign transaction but solely to store value must be stopped. Nigerians, especially the wealthy and those in government, must refrain from converting their excess Naira to dollars for storage. Nigerians must be patriotic and sacrifice these illusional gains to save the Naira. The hoarding of dollars must be stopped by limiting the Naira in circulation, encouraging digital currency, and strictly monitoring cash movement. 

There are more dollars in the hands of people than in the banks, which is why the Central Bank of Nigeria (CBN) cannot control the market. Since the CBN has limited control, Nigerians should only demand the dollar when there is a genuine need for it, specifically for foreign goods or services. 

Increased productivity, import substitution, and strict adherence to genuine demand for the dollar are essential. By doing so, the black market for dollars can be eliminated, as there will be enough dollars in the banking system to meet all legitimate demands.

The government must cut its spending and prioritize key areas. A reduction in the deficit will free up more foreign exchange for market control. The government must cease borrowing, as the burden of debt makes it difficult to control the exchange rate when some of the available dollars are used for debt servicing.

The CBN must halt the production of more Naira; making the Naira scarce could help improve its value. The scarcer the Naira, the more valuable it becomes. A scarcer and more valuable Naira will be critical in this strategy. 

Redenominating the Naira notes could also be an option only after improving the export sector. This could be achieved by removing one zero from each Naira note to restore confidence in the currency. This would mean that a N1000 note would become N100 at its face value. If implemented today, the value of the dollar would become N160. This step could help build confidence in the Naira. 

People must have confidence in the Naira, regardless of the amount they possess. Confidence in the Naira is an essential feature of a strong currency. Other countries that faced similar challenges resorted to even reintroducing a new currency and, at some points, demonetizing their currencies, allowing any desirable foreign currency to be used as a means of exchange in their countries. This is the worst-case scenario.

There are no two ways about it. The art of saving a currency is the art of production. No monetary or fiscal policy will work if we don’t produce for exports. A stronger Naira is possible only with stronger patriotism. Those hoarding dollars and using sentiment to inflate the value of the dollar are the true enemies of the economy; by hoarding the dollar, they are increasing inflation and thereby reducing the purchasing power of poor people's income and the purchasing power of what they will eventually gain in Naira value. So, they are digging a hole for themselves, too. With patriotism, increased production for exports, reduced importation, and adequate dollars in the banking system, the dollar could be pegged at below N200.

Ahmed Adamu

Associate Professor of Economics

Nile University of Nigeria, Abuja

ahmadadamu1@gmail.com

Single Exchange Rate in Nigeria: Conditions and Process

  Ahmed Adamu, PhD

In 1985, one Naira was equivalent to one dollar. In 2023, one dollar equals N760, representing a 75,900% Naira depreciation in just 38 years. In the previous eight years, Naira depreciated by 265%. Based on the trend, the dollar may keep increasing towards N1000 per dollar if nothing is done.

 This depreciation implies that the things we buy abroad are 75,900% more expensive in just 38 years and 265% more expensive in the last eight years. The items we purchase are costly because of exchange rate inflation. If the Naira value falls, the cost of importation and inputs becomes more expensive.

 A Naira/Dollar exchange rate affects our income and spending. Once the dollar becomes more expensive, our pockets are slighter and our spending smaller. Inflation will also go higher. Businesses will incur more costs and reduce their employment potential, increasing unemployment. Unemployment leads to insecurity and cripples productivity. So, all our problems are caused by the Naira depreciation.

 The Naira's weakness to the dollar affects the exchange rate with other currencies too. For example, if $1=N710 and $1=£0.82, then £ to N becomes 0.82/710 =£0.001 for N1. Making all imports from all destinations more expensive.

 The Central Bank of Nigeria (CBN) is primarily responsible for the bad management of the exchange rate regime and its complacency in brokering the dollar for personal gains. One of the problems with the exchange rate is the two different dollar markets. We must merge it into one, but how?

 First, we must evaluate the current exchange rate regime to assess the reasons for having a dual exchange rate regime and its associated challenges.

 The Central Bank cannot meet the Nigerians' demand for dollars. As a result, a separate market allows Nigerians to source and sell dollars at a willing-buyer-willing-seller rate. This created two markets for the dollar; the one that CBN sells to banks and the open market, commonly called the black or free market.

 Rent seekers are taking advantage of the two markets and conspiring with bank officials to divert the dollars to the black markets. Customers with genuine demand could not get the dollars and were forced to buy at the expensive black market.

 The continuous arbitrage and rent-seeking are partly responsible for the expensiveness of the dollar in the free market. The inefficiency of the official market led to an increase in dollar demand in the black market. People import raw greenbacks (paper dollars) into Nigeria for sale. The dollar supply comes with no value addition but just for some personal gain purposes.

 The CBN had abolished selling dollars to BDCs because no one brings dollars to the banks, and everyone takes their dollars to black markets. Exporters do not remit to the Nigeria Export Proceeds (NXP) account.

 The CBN will get drained and cannot continue like this. Even if they continue, it will not meet the demand, and the dollar will still be scarce. The CBN created windows for people to become billionaires through the two exchange windows in a few weeks. So, why the double losses - loss of reserves and loss of naira value?

 Having two markets for the dollar, one cheaper and the other expensive will always create arbitrage, which makes the economy lose for some people’s gains. Therefore, having two exchange rates is bad for the economy. Therefore, there should be only one exchange rate market.

 One of our best options is the managed floating exchange rate. Under this regime, a particular currency band will be set, beyond or below which the exchange rate will not pass. The CBN will clear any extension beyond the bands to keep them back within the band by flooding the market - band realignment. So, the two markets should be unified, starting at a specific equilibrium rate that is fair for both markets but blocked within a range.

 Unification under managed floating will discourage speculators. Speculators anticipate the future and act now. If they expect the dollar to appreciate more, they will buy forward. If they anticipate the dollar to fall, they will sell forward. They are profit driven. However, when the exchange rate is blocked within a range, there will not be a high speculation motive. The market will be for only commercial needs.

 The currency band could be +/-2% from the equilibrium point daily or 10% annually. This will continue until the maturity of the export sectors and more forexes are received. The government can then flexibly appreciate or depreciate the currency through the demand and supply of foreign currency. This regime will be highly effective when we have huge reserves.

 The quantity of Forex that CBN is spending on incentivizing rent-seeking within banking systems and other windows should be used to stabilize the market within the threshold. The CBN should block the black-market rate to reduce its volatility.

 This system is suitable for stabilizing the currency and bringing in more investors. Countries practicing this regime include China, Brazil, South Korea, South Africa, Mexico, Israel, Turkey, New Zealand, etc.

 The government should avoid making abrupt announcements to migrate into the managed floating regime. It should get involved in the black market and gradually flood it to decrease the exchange rate. The CBN should phase out its dollar allocation to the banks. The banks will have to source the dollars at the market. The black and official markets will converge into a single market. The rate at the single market should be pushed lower down through monetary and fiscal policy means.

 The money in circulation is already being reduced, the removal of petroleum subsidy has reduced the purchasing power of Nigerians’ income, and spending substitution is in effect. Therefore, the demand for the dollar will be reduced, while its supply will be high through the CBN action.

 With the liberalization of the petroleum products markets, upcoming local refineries, and expected improvement in oil production, the CBN foreign exchange reserves will increase to enable it to manage exchange rate fluctuations within the band.

 Rather than an abrupt shift, the government should consider a gradual convergence towards the single exchange rate regime. Initially, narrow the gap between the two exchange rates by reducing the spreads and minimizing distortions. This can be achieved through market-based reforms and easing restrictions on foreign currency transactions.

 The government must carry the citizens along, explain the new system’s benefits to them, and create room for addressing people’s concerns and uncertainties. The political appointments in the economic sector must be based on merit. The CBN governor should be an Economist. We can consult other countries that have transitioned to a single exchange regime to learn from their experience and adapt the best practices to our country’s specific circumstances.

 Most importantly, for any policy to work, Nigerians must play their roles. At this moment, the government cannot do it alone. It requires everyone's sacrifice. People must learn to be patriotic and forfeit some gains that hurt the economy.

 Nigerians must believe that they are somewhat responsible for this country. More than half of the foreign exchange crisis in Nigeria is because of our attitude. These attitudes range from rent-seeking, dollar hoarding, dollar brokering, and preferring foreign goods and services to local ones to extravagance and excesses.

 Another condition for the single regime is that we must make people from foreign countries come and seek Naira. And to do that, we must produce what those people want locally. That is the way to create demand for Naira, which is exports. We should focus on building the solid mineral and agricultural sector to achieve this objective. That is why the Nigerian constitution should be amended to allow states to own and develop solid mineral deposits in their states.

 According to a PWC report, Nigeria is losing over 10 billion dollars annually from Agro export worldwide. With value addition, the gain might be higher. These are quick ways of creating demand for the Naira. Our comparative advantages are mainly solid minerals and agriculture. We should focus on them first and then diversify into industrialization.

One of the fiscal actions to stabilize the exchange rate is to reduce government foreign spending. The cost of governance should be reduced. Dollarization within government institutions should be reduced as well.  Fixing the dollar issues is solving Inflation. All exchange rate policies fix the inflation problem. 

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com

 

Finally, Petroleum Subsidy is Gone: The Implications

The final removal of petroleum subsidy in Nigeria is a welcome development. It means the market will determine the fuel price, i.e., willing buyer, willing seller price. It also means that many companies can import petrol and sell it at a price they want to recover their costs and make a profit.

Many suppliers will be posting their market prices. We will see variations in posted prices by companies—no more regulated prices by the government.

The petrol price will fluctuate periodically as crude oil prices and dollar exchange rates change. NNPC Limited and other importers will post their prices whenever there is a change in the variables that affect the cost of their fuel. These could be the distance from which the fuel is imported, its quality, or variation in profit margins.

NNPC Limited posted prices will be the benchmark for the petrol market because it is a fairer and stronger player.

Prices will be coming down in the event of lower crude oil prices. However, there could be collusion by the importers to stick to a higher price even at a low crude oil price. But, higher prices attract more supply, and less demand, leading to excess supply, which brings prices down.

When the Dangote refinery starts operation, the petroleum products importers will then buy from the local refiner, thereby saving the extra costs of distance transportation costs and foreign inflation from the source country. They will be able to reduce their posted prices then.

The marketers will get Dangote's fuel at least N30 less than the imported fuel per liter. They will enjoy Dangote's economy of scale (producing more at cheaper costs) and local production. This cost-saving could be higher due to cheap labor in Nigeria. However, this does not remove the possibility of some marketers sourcing the product cheaper elsewhere.

Marketers that buy from the Dangote refinery will sell first. And if they can meet the local consumption, those that import expensive fuel will be pushed out of the market.

With the sudden increase in fuel price by more than 170% due to the subsidy removal, the economy will shrink in the short run as productivity reduces. There will be less demand for petrol, and overall spending will decrease. Businesses will lay off staff to cope with the increasing cost of doing business, and general welfare will reduce.

However, there will be new inventions as people start looking for alternatives. They will explore alternative transport systems or fuel or adjust their lifestyle. More business opportunities will emerge from this development. People will now begin to organize collaborative transportation means to share or reduce the cost of transportation per head.

There will be efficiency of demand and reduced wastages, and Unnecessary trips will reduce. There will be fewer cars on the road and reduced carbon emissions. The NNPC Limited remittance to the government will increase because the cost of the subsidy is being removed. This enables the government to do more development projects and borrow less.  

Even though the approach by President Tinubu needed to be more systematic, it has minimized the chances of prolonged speculative buying by retailers in the event of scheduling the removal on a designated future date.

However, because of his sudden announcement, there are now excessive supplier surpluses. Retailers of petrol that bought their products at a subsidized price just before the announcement are selling them at higher market prices, causing consumer losses and abnormal profit for the suppliers. That is the immediate effect of such a sudden pronouncement.

For example, a retailer that bought a truck of 45 thousand liters at an ex-depot price of N179 per liter just before the announcement is now selling it at N540 per liter, making a surplus of more than N15 million per truck.

Consumer losses are still inevitable even if a future date of the removal is announced, as retailers will engage in even more speculative buying ahead of the date to hoard as many large inventories as possible, wait for the removal date, and make abnormal profits.

The good news is that many filling stations will open, and long queues will disappear, but consumers will lose. One of the conditions for removing the subsidy is sufficient local refining capacity. With the Dangote refinery, there will be a lower price of about N30 or more per liter compared to the imported one due to the advantage of local production.

The Dangote refinery will reduce Nigeria's import bill because, as of now, imported petroleum products are the biggest bill in Nigeria's import basket. So, the Dangote refinery will reduce the supply of Naira, leading to its appreciation. It will positively affect Nigeria's balance of payment due to the exports of petroleum products by the refinery.

Other countries will also bring their crude oil for refining in Nigeria and pay in dollars, thereby growing the impact of the oil sector on GDP. However, Dangote will buy Nigeria's crude oil in dollars, sell the refined petrol in Naira only to Nigerians, and exchange any desired quantity of the Naira receipts for Dollars at the CBN.

Therefore, from the economic perspective, these two developments favor the economy's growth. They will create new business opportunities and lifestyles. The short run will be challenging, but the long run will be stable.

Ahmed Adamu, PhD
Petroleum Economist,
ahmadadamu1@gmail.com 

Kolmani Oil Discovery: What it means

Ahmed Adamu, PhD

Some Nigerians had some euphoria as the game-changing oil and gas discovery in Kolmani, a Northern Nigerian area, was announced. It is the first Northern Nigerian proven petroleum reserve, sixty-six years after petroleum discovery in southern Nigeria. "What does this discovery mean to us as Nigerians and northerners," someone from the north called and asked me.

An estimated proven reserve of 1 billion barrels of crude oil and 500 billion cubic feet of natural gas were found in an oil field that straddles Bauchi and Gombe states, known as the Kolmani oil field. The commercial quantity of the oil reserve in this area could increase in the future.

Anywhere oil is found in Nigeria belongs to the federation. The only benefits to the host community are the 3% of the oil operating cost in the area from the preceding year and the constitutional 13% derivation funds to the state government. The new oil-rich states will benefit from these two sources.

The 3% is only for the oil-bearing communities; other non-oil-bearing communities will not benefit from it. At the same time, 13% of all the revenue generated from the oil produced in the state will go to the state government. Oil-producing states and their host communities could get more than N100 billion in a year from these two sources alone.

Other extended benefits to the new oil-rich states could be direct jobs for high, medium, and small-skilled labor. Already some Indian oil companies have shown interest in becoming partners in developing the onshore Kolmani oil fields.

Onshore oil production in Nigeria, like the Kolmani field, is not attractive to major oil-producing companies. The five major oil companies operating in Nigeria are divesting from onshore and shallow water oil fields despite the recent reduction in taxes and royalties in the PIA. Oil companies prefer deep water oil production to avoid hostilities from restiveness, vandalism, and insecurity associated with the onshore oil production areas.

Because of what is stated in the PIA relating to the 3% for host communities, the Kolmani oil production should not experience restiveness and vandalism. The PIA said, "In any year where an act of vandalism, sabotage or other civil unrest occurs which causes damage to petroleum and designated facilities or disrupts production activities within the host communities, the community will forfeit its entitlement to the extent of the cost of repairs". Host communities' benefits are now tied to the smooth running of the oil production in their area.

NNPC limited will be the Kolmani oil and gas concessionaire and will lift Nigeria's profit oil and gas from the oil field and transfer the proceeds to the Nigerian Petroleum Upstream commission after deducting its service cost. However, the profit oil could only be derived after cost recovery by the developers of the field, known as contractors.

The New Nigeria Development Company (NNDC) is the lease owner for petroleum mining on the field. But, could NNDC be able to develop this new oil field? No. NNDC may not have the technical and financial readiness to develop the Kolmani field yet. Therefore, oil companies must be contracted to spend millions of dollars and provide technical expertise to develop the area.

There will not be a profit oil and gas from the field until after some years of production to allow the contractors to recover their cost, but this depends on the oil price and contract agreements. Mainly the cost incurred by the contractor in developing the field is amortized and may take up to the first five years of production, and then the profit sharing will start. This is to allow the operators to recover their costs of development. The government will transfer the exploration costs to the operator, which will add to the total cost of oil.

The only money that will be accruing to the federation account in the early years of production will be the royalty crude and hydrocarbon taxes (only if there is a profit), which are 15% and 30% of the crude oil produced, respectively. It could take between five to ten years to develop the field. So, any financial benefits will be after developing the area.

Would the focus be on developing crude oil only or both crude oil and gas? Natural gas has far-reaching economic benefits, but developing it is more expensive. With the ongoing gas pipeline projects, there could be more gas supply from this field which will help industrial growth in the country.

Now, some states will begin to suspect their possible oil and gas reserves. We can now conclude that every part of Nigeria has a possible oil and gas reserve. With the first oil discovery in the north and with the creation of the Frontier Exploration Funds, more exploration will be undertaken in the north. The Frontier Exploration Fund is funded by 30% of the NNPC Limited profit oil and gas and 10% of all rents on petroleum licenses and leases.

Many states are facing debt and development issues and might wish to have more control and access to the natural resources in their states to fix their problems. More oil, gas, and other natural resources could be harnessed when state governments are given the right to control those resources. States will maximize their potential resources to outcompete each other.

In the event of states' resource control, people ask, how could border states handle shared oil and gas fields that cross their borders? Just like the Kolmani oil and gas field, which straddles across Gombe and Bauchi states. Any state that produces more at the border areas may draw more oil from the neighboring state. So, who drills first captures the oil.

 To avoid over-production and damage to the environment at the border areas, the neighboring states should unify the oil field, appoint a single operator, and share the profit based on where the field lies in relation to the boundary. State governments in a geo-political zone could undertake this kind of unification.

Even after states' resource control, further oil explorations will continue to search for more oil and gas reserves in the states that do not confirm their petroleum deposits yet. So, non-oil-producing states could become oil producers eventually.

With oil fading away and growing restrictions on the use of fossil fuels, we can maximize the utilization of our endowed petroleum resources to build infrastructure and the economy and fund alternative energy sources and consumption.

Finally, more oil reserves without growing and functioning refineries will not make any difference. The focus should be on functioning and adequate refineries locally to stop importing refined petroleum. Imported refined petroleum is the biggest bill in our import basket. Having local refineries will help restore the value of our exchange rates. Government refineries must be privatized as soon as possible, and modular refineries should be encouraged to grow their efficiencies and capacities. So, the discovery of oil and gas in the Kolmani area is not a given benefit; it is a potential benefit, so celebrate not yet.

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com 

How Subsidy Removal on Diesel causes Scarcity and High Price of Petrol in Nigeria.

Ahmed Adamu, PhD

The removal of subsidy on Diesel coupled with the increase in the international oil price led to the increase in the price of Diesel by 180% in just a year. This caused some banks to close early because they cannot afford the higher diesel prices. Other businesses and commercial centers also shortened the duration of their services. This slows down the economy. The cost of transporting goods and petrol has more than doubled, as a result, hence the unprecedented inflation, which was 17% as of April 2022.

Removing subsidy on Diesel have more effect on inflation because heavy transportation of goods and fuels are done using trucks that use Diesel. Commercial and industrial centers are more affected by Diesel inflation than petrol inflation. 

The cost of doing business and producer transportation is largely affected by the Diesel price increase. To avoid increasing the cost of production, countries like Brazil delayed removing the subsidy on Diesel until after the successful removal of the subsidy on jet fuel, gasoline, and LPG.

Petrol, known as PMS in Nigeria, directly affects the cost of mostly human transportation. Despite subsidizing the PMS price, inflation is still going high and fuel scarcity is becoming worse because diesel prices are increased.

Now, what is the link between diesel price hikes and fuel scarcity?

In the Nigerian PMS pricing template, marketers of the fuel are paid for the bridging cost to ensure price equalization across the country, now that the marketers are paying more for every distance because of diesel price increases, they are demanding more to pay for their inflated transportation costs. 

However, the government wants to stick to the existing N165/liter pricing template, which allows for a lower bridging cost. Marketers are now left with the option to either stop operations or sell at a more expensive location to recoup their transportation costs.

Locations like Abuja where officials can easily trace any violation of the pricing regime suffer the most. Marketers avoid Abuja because they are forced to sell at a lower price than they wanted. They would rather take it to other locations that have little or no supervision and sell it at their desired prices. Higher prices always fix excess demand, that’s why queues are less outside Abuja.

On the other hand, the government is shying away from adjusting the pricing template because it will mean paying more for the bridging purpose, which is a form of additional subsidy. Already, the government planned to spend N3 trillion on subsidy this year, and additional bridging costs are going to add to the subsidy burden.

The Nigerian government has only six months since the passage of the PIA to stop all kinds of fuel subsidies. This means subsidies cannot exceed June 2022. 

President Buhari has no plan on how to convince Nigerians or deal with the subsidy removal. He is now scared of the public resistance and the implication of that for his party in the forthcoming election. That is why President Buhari must send a bill for the amendment of the PIA to enable him elongate petroleum subsidy, otherwise, petroleum subsidy is illegal from the end of June.

With the landing cost of about N600 per liter, removing the subsidy will make the government save N29 billion every day, and will help clear all the queues at the filling stations. However, the pump price will be above N600 per liter. 

Is Buhari’s administration ready for this reality? Keeping subsidies or removing subsidies; both options have painful consequences, the best thing to do is to go for what is best for Nigerians for a longer period even if it hurts more now.

With the price of oil being $126 per barrel as of June 2022, the highest oil price in more than a decade, Nigeria stands for no gain. The only oil-exporting country that does not benefit from the high oil price. Because higher oil prices mean higher subsidy payments, where a 1% increase in oil prices leads to a 1.58% increase in subsidy spending.

Sometimes, the Nigerian government would prefer low oil prices to avoid higher subsidy bills. In just 20 years, the Nigerian government has paid over N14 trillion on petroleum subsidies. Imagine the opportunity cost of that huge amount. That amount would have been enough to build refineries, but we are still left with no working refining capacities.

Our refineries are big liabilities, as Nigerians’ money is used to keep them alive even without refining a single liter. Now, that NNPC is commercialized, refineries are open for grabs, but even NNPC limited is afraid to take the refineries because of their liabilities. So, if the government cannot handle the refineries, they must be sold, because billions of Naira are lost to the refineries that are not working.

One thing that will take Nigeria off the hook is full deregulation, President Buhari should stick to the PIA calendar for the subsidy removal and the refineries should be privatized too. However, there are certain steps, conditions, investments, and lifestyle reforms that must be in place for subsidy removal to be seamless.

Ahmed Adamu

Petroleum Economist

ahmadadamu1@gmail.com

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Big Economic Crisis Looms in Nigeria

Ahmed Adamu, PhD

As Nigeria heads to a decisive election in 2023, attentions are largely on the candidates and political parties and intrigues in between. Little do Nigerians know about the impending danger their economy faces. 

 

The Nigerian currency faces the worst devaluation ever as Nigerians shun away from their local currencies. There are now competing dollar queues in Nigerian banking halls. Nigerians are rushing to open dollar accounts and converting their savings into dollars. 

People prefer to store their money in dollars than in Naira, as keeping the dollar alone is now a lucrative investment due to the continuous Naira devaluation. The increasing demand for the dollar increases the supply of the Naira and hence its continuous devaluation. 

Most of the demand for the dollar is not for transaction purposes but speculative reasons. Hoarding the dollar and waiting for it to increase value to sell it is disastrous and treasonous economically. 

Dollar hoarding and speculation increase the supply of Naira in circulation and fuel even more inflation. Already the headline inflation is as high as 16% as of the first quarter of 2022. More Naira in circulation will increase inflation to above 20%. As the 2023 election season has started, election and campaign spending by politicians will fuel even more inflation. 

Naira is losing value in the eyes of Nigerians, and that’s why it will continue to deteriorate. Some hotels, landlords, and schools in Nigeria charge in dollars instead of Naira. 

Trading local goods and services in dollars is the surefire way to total economic collapse. Even government transactions and spendings are also in dollars. These created huge dollar demand and scarcity and shot its value high, which as of April 2022, stands at N590 in the parallel market. 

Foreign investors are now finding it difficult to repatriate their revenue from Nigeria in foreign currencies. Some international airlines have complained about their inability to repatriate their revenues in dollars, which forced them to now sell their tickets only in dollars. This development will further increase the demand for the dollar and the oversupply of the Naira and further devalue the Naira.

The continuous devaluation of the Naira is putting enormous pressure on Nigeria’s foreign reserve, which was questionably reported to be around $40 billion as of February 2022. The parity fixed exchange rate policy is widening the depletion of the foreign reserve. 

Sometimes, authorities might not be open about the reserve depletion to protect the integrity of the economy. However, if the effect explodes, it will be catastrophic. 

The increasing cost of pegging the dollar will soon become unbearable. However, liberalizing the exchange rate market will increase the dollar value to about N1,000 or more. This will cause hyperinflation, increasing unemployment, and capital flight. It is the trap Nigeria found itself in.

Investors are already avoiding Nigeria due to the fluctuating and unreliable forex policies. Existing investors are already thinking of divesting. Foreign Direct Investment inflows are at their lowest in a decade. The main source of forex in Nigeria is crude oil sales, and that is also reducing due to the crude oil swap system. 

Investment analysts highlighted severe social, market, and political risks of investing in Nigeria. These range from insecurity, insufficient infrastructure, and government interventions to political unrest and instabilities.

These risks caused an almost a collapse in the non-oil exports in the country, leaving the economy very susceptible to oil market volatilities. It also makes imports susceptible to exchange rate fluctuations and foreign inflation. 

The local manufacturers struggle to acquire expensive dollars to import capital and inputs. These are conditions for hyperinflation, a serious economic crisis that could destroy the Naira. Once the Naira collapses, so does Nigeria’s economy.

With the increasing capital flights, imports, borrowing, and budget deficit, one can only wait for the inevitable explosion. 

Very soon Nigeria’s government may become unable to peg the value of the dollar, and once this happens, then the worst catastrophe will befall the Naira. The collapse of the Naira will demolish the purchasing power of people’s income and usher in more hunger and poverty. Once these happen, the total anarchy will set in.

However, the above impending agony can be prevented by taking certain decisive actions. First, the Central Bank of Nigeria (CBN) must be checkmated to fish out excesses and effectively manage the forex policy through transparency and fairness. 

The CBN must meet the demand of the foreign investors and airlines to enable them easily repatriate their income in foreign currency. This will boost investor confidence by having the guarantee of liquidity of their returns in their desired currency. 

The unnecessary discharge and sale of dollars must be stopped. There should be new reforms to discourage trading physical dollars in the country. The government should set a maximum target for using dollars for official activities and transactions. 

The government should minimize the need for dollars in its transactions. We have to add value to our locally manufactured products and services to increase the supply of forex through exports. Citizens must be conscientise of the importance of valuing the local currency and the danger of saving or transacting locally in dollars.

For us to manage our economy, we have to manage inflation and restore confidence in Naira, and this can only happen through economic reforms such as import substitutions, forex reforms, and investment in infrastructure. 

We have to develop our major mineral resources and build the agricultural value chain for exports and attract forex. Foreign investors can only come if we can strategically address the social, economic, and political risks in the country.

The next administration has a herculean task to rescue the sinking economy first before rebuilding it. That is why the focus should be on which candidates understand the economy and the solutions. Otherwise, we will all be doomed and fall into serious economic crises like what happened in Asia in 1997, Zimbabwe in 2008, and recently in Sri Lanka. 

The 2023 election is not just a common election between parties, it is a decision on the fate of our economy and by extension our survival. Therefore, it is not about a region, party, or ethnicity, it is about the vision that could overturn the current mayhem.

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com

@AhmedAdamu

Fuel Scarcity: Issues and Solutions

Ahmed Adamu, PhD

Most refineries are designed to produce certain specifications of petroleum products, depending on the market requirement. Though, some modern refineries are equipped to produce varying specifications of the products. This enables marketers to buy petrol and blend it with some chemical substance to meet varying destination requirements.

Each country has a specific chemical composition requirement for their petrol. The marketers or refineries can blend the petrol to suit each country’s specifications.

Methanol is a chemical substance added to petrol for smooth running in car engines. It helps in increasing fuel efficiency and reducing energy intensity and CO2 emissions. The Nigerian gasoline-powered vehicles are compatible with petrol blended with up to 5% methanol. Some countries allow only 2-3% of the methanol in their petrol. 

Early February 2022, Nigeria imported 200 million liters of petrol from Belgium through a crude oil swap arrangement. The imported petrol contained methanol up to 20%, which is far above the methanol content threshold in Nigeria. This petrol is called off-spec petrol for Nigeria. For any Nigerian vehicle to use this petrol, it has to be retrofitted. Countries like Brazil and Germany who retrofitted some of their vehicles may use this kind of specific petrol.

Nigerian officials were not aware of the off-spec petrol, and they allowed it to enter the Nigerian market. Some vehicle owners started noticing some damages and malfunctions in their vehicles after taking the off-spec petrol. That was when Nigerian officials realized that the imported petrol was not suitable for Nigerian vehicles. They have to call all the petrol back to the depots.

The withdrawal of the 200 million liters of petrol created a supply glitch in the country, hence the scarcity. Since Nigeria is vulnerable due to its sole reliance on imported petrol, Nigerians have to wait on filling stations queues until the next importation. Any slightest petroleum import glitch always affects Nigeria significantly.

Had it been Nigerian officials have tested for the methanol content, they would have noticed it since from the departure country or at least at the arrival of the vessels at the Nigerian seaports. Nigerian officials only test for vapor pressure, benzene, sulfur content, and density. From this experience, Nigerian officials should start testing for methanol content levels for any imported petrol.

The resultant scarcity has created a window for unscrupulous petroleum sellers to charge exorbitant prices. Unconfirmed reports suggested that a liter of petrol is sold at N1000 in some places. The welfare of the people has been negatively affected as a result. People sleep in the queue at filling stations. The movement of people and goods have reduced significantly, slowing down the entire economy and pushing inflation further high. 

For the supply to stabilize, more petrol has to be imported to clear the queues and meet the subsequent usual daily demand. The Nigerian officials committed to buying 2.3 billion liters of petrol to bridge the supply gap. The importer of the adulterated fuel must take it back and re-supply its equivalent with some additional penalties.

It might take weeks or months to bridge the supply gap. The 2.3 billion liters of emergency import will add to spending on the side of the government for petroleum consumption. Already the government is planning to spend N2.6 trillion for petroleum subsidy consumption. These are huge burdens just for petroleum importation and subsidizing petroleum consumption in Nigeria.

No administration will ever succeed without stopping petroleum importation and removing petroleum subsidies. However, the removal of the subsidy must be under certain conditions and through a certain gradual process. These conditions include sufficient local refineries, exchange rate stability, and single-digit inflation. 

The steps for removing the subsidy include petroleum consumption auditing to ascertain and track petroleum consumption. The next step is the petroleum consumption reduction program, which will target reducing the daily liter consumptions in Nigeria from 70 million liters to about 30 million liters. This is possible by targeting large consumption cities like Abuja, Lagos, and Kano.

The program will require investment in mass transport systems, which include convenient public trains, light rail transit, and busses in these cities. The idea is to impose car taxes to discourage people from using their cars and incentivize them to use the public transport systems. This will reduce the energy per capita consumption in these cities and encourage the use of alternative fuels like CNG and LPG in these mass transport facilities. The program could be extended to other major cities gradually.

Imagine a scenario of ten people going to the same office daily, using ten different cars at the same time, and consuming the same quantity of fuel each. If coming and going to the office consumes 5 liters daily, it will mean 5 liters multiplied by 10 people, which is 50 liters of petrol daily. But when they all use one vehicle, the energy consumption will be only 5 liters daily, which means petroleum consumption is reduced by 90%. The payment of subsidy for these people will reduce by 90%. That is the energy conservation process of removing the petroleum subsidy.

But the public transport systems must be in place first. The private sector could be mobilized for such investments. Then, the next step will be the implementation of the targeted subsidy, which I explained clearly in my previous article.

The subsidy issue has been and will continue to be an issue and a great burden on the government. After fixing the current petroleum scarcity, the government must come up with a strategic roadmap for addressing the subsidy issues. The current scarcity is one of the serious shortages Nigerians have experienced in a decade.

Lastly, the question now is why and who imported the off-spec petrol into Nigeria? Was it deliberate? Was it the refiner or the marketer? This investigation must be conducted, and Nigerians must be informed. 

Punishing the culprits would also serve as a deterrent to others. It might be possible the marketers might have blended the petrol on the sea during the transit, or it might be the refiner that mixed the wrong quantity of the methanol. Whatever, Nigerians will be waiting for an explanation and looking forward to measures that will prevent future occurrences of the situation.

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com

.

The Petroleum Subsidy Trap and The Way Forward

Ahmed Adamu, PhD

Lack of refining capacities and Petroleum subsidies have caused Nigeria to lose significant foreign exchange and its ability to fund infrastructural development. 

The Nigerian government's share of crude oil averaged around 900k barrels per day in 2021, and at least 70% of that was exchanged for petroleum products, which means only 30% of our crude oil exports brought back dollars. 

Going by the above, Nigeria received an average of only $20 million per day from oil exports in 2021. On the other hand, Nigeria loses a minimum of $45 million cash to crude oil swaps every day. 

Instead of receiving dollars after selling our crude oil, we receive refined petroleum to fill the local refining capacity deficiencies and meet the outrageous local petrol demand. 

That has caused the flow of foreign exchange into Nigeria to reduce drastically, which caused the deterioration of our foreign exchange reserve, dollar scarcity, Naira devaluation, and hence inflation. That is the cost of not having sufficient local refineries.  

On top of that, the Nigerian government is spending more than N150 billion monthly on petroleum subsidies. These funds would have been for infrastructural development and job creation programs. Nigerian government loses a significant amount of revenue due to petroleum regulation. 

The subsidy also leads to serious supply leakages, where more than 40% of subsidized petroleum is being arbitraged in neighboring countries. Nigeria is creating a business opportunity for rent-seekers to buy the Nigerian subsidized petrol and then sell it at an expensive market to make a profit. This is a big revenue leakage that petroleum subsidy causes. 

Petroleum Subsidy is an "evil necessity" at the moment; Despite the above challenges, the government must continue with petroleum subsidy. There is no doubt that the petroleum subsidy is not sustainable for now, but the question is when and how to remove it? 

In the meantime, Nigerians cannot afford the unsubsidized price of petrol. Without petroleum subsidies, petrol prices will be more susceptible to fluctuations in crude oil prices and exchange rates. Prices at filling stations will fluctuate to any change in the exchange rate and crude oil price. These fluctuations could happen on daily basis. 

The deregulated petrol price will be anything above N300 per liter at the moment; this will cause further inflation because everything links to the petrol price. The resultant inflation will harm the economy more than the subsidy harms the economy at the moment. Now, this is the trap.

Now, to answer when to remove subsidy. The best time to remove petroleum subsidy is when there is a minimum of 500k barrels per day of local refining capacities, when the exchange rate is stable, and when inflation is at a single digit. 

Dangote refinery is still at a "maybe" state; there is no specific time when it is likely to start operating, but if it does, it will help satisfy the first and most important condition. 

Achieving the first condition will enable us to achieve the second condition of exchange rate stability, but that has to be complemented with import substitution strategies. Fulfilling the first and second conditions will automatically make the third condition achievable.

 

But the how-to remove the subsidy is the main question. We have options of targetted subsidy or quota subsidy as phasing out strategies. Let us look at the targeted subsidy strategy first.

Under this regime; any Nigerian that wants to benefit from the petroleum subsidy will have to enroll in the subsidy program, where his biometric data will be collected and linked to his vehicle details. A person will receive an electronic sticker that will be scanned to verify his national identity, biometric data, and vehicle specifications at the point of purchasing the subsidized petrol.

Petrol stations will have to enroll in this subsidy regime, and it is only the affiliated filling stations that will be selling the subsidized petrol. The government should incentivize filling stations to sign up for the subsidy regime. 

Other filling stations that did not join the program will be selling the petrol at the market price. So, you will have two sets of filling stations: the ones that sell at a subsidized price and the others that do not. 

Nigerians that can afford the unsubsidized petrol will conveniently buy from the unaffiliated filling stations. While others will have to consume at the filling stations that signed up for the subsidy program. That is why the government should ensure many filling stations, especially in the rural areas signed up for the program. 

By doing that, the consumption of subsidized petroleum will be limited to only Nigerians and the subsidy spending will reduce drastically. The government may target a certain subsidy payment threshold every month.  Every beneficiary should have a maximum number of allocated liters per month to avoid round-tripping. 

By implementing this, only less than 30 million liters per day will be subsidized, as against the reported 70 million liters, which automatically makes the Nigerian government save up to N90 billion every month and still provide the subsidy to the poor people. 

Another alternative phasing out strategy is the quota subsidy, where a certain number of liters are allocated proportionately to categories of consumers monthly. The consumer categories will include commercial vehicle users, industrial vehicle users, and private vehicle users. 

This will narrow down the subsidy more to the poor and consumer goods production processes. The need for the government to fund palliatives may not arise, as the masses will continue to enjoy the subsidy. 

Finally, the savings from the reduction in subsidy spending may be used for railway construction to interlink the country for easier and cheaper transportation. This will translate into cheaper consumer products. The government should stop giving cash palliatives but implement capital projects that ease businesses. 

The government should be honest and transparent in dealing with petroleum subsidy issues. Delaying the subsidy removal until after the election is purely political, unpatriotic, and patronizing. Punishing Nigerians after using them for electoral votes is treason.  

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com 

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How to urgently fix insecurity in Northern Nigeria

- Ahmed Adamu, PhD

 

Since the recent exacerbation of terrorism in northern Nigeria, there have not been serious legal actions to punish the culprits. There should be an emergency court for trying the criminals and immediately convict them.

 

There should be a special law that dictates the kinds of punishment for every kind of complicity in banditry and kidnapping. The punishment should be severe and in the public view. It will serve as a deterrent to others who might be tempted to be involved in any kind of terrorism.

 

The government cannot fix this level of insecurity in a short while, that is why the citizens have to come in.  For northern Nigeria, there should be an independent body or forum that will unite the expertise and resources of all active and retired professionals and elites from the region. 

 

The forum will be independent of the government and should have a structure down to the local government levels. It will be managed by highly respected and experienced people in the region. The forum might be named “Arewa Development Forum”.

 

The forum will feed the various state governments individually and as a group with ideas and strategies and help harmonize their approaches toward combating the insecurity.

 

The body will establish “The Arewa Development Trust Fund”, where every working and capable northerner will be contributing a willing amount of money monthly. The funds will be used for compulsory education for all and some basic infrastructural development in the northern rural areas.

 

The extent of the abject poverty in the north is unimaginable. There are still villages where they don’t have schools and no access to electricity. These villages have no road and potable water, and their population is growing.

 

The Arewa Funds will be used to build infrastructure in these kinds of villages. It will be used to build schools and sponsor every child’s education, especially in remote areas. It will be used for free education for every northerner. New teachers will be trained and recruited and paid well from the funds.

 

The Funds should be used to address street children begging and hawking. The Forum will conduct a census of the “Almajiri Child” for a database of their locations and their homes of origin, with a plan to send every child back to their parents.

 

The parents should be incentivized for keeping and supporting their children's education. The Funds can also be used to support modern and mechanized farming, including animal rearing and ranches. It can also be used for capital seed for women's entrepreneurship and businesses.

 

All the international donor agencies and NGOs that want to work in Northern Nigeria should work with the Arewa Development Forum. The idea is to harmonize the resources for efficiency, devoid of duplication.

 

The governments of all the northern states should contribute to the funds. International Organizations and Foundations should be solicited to contribute to the Funds. The idea is to generate and spend at least N2 trillion for only education and basic infrastructure in rural areas of the region.

 

If we can have up to ten million northerners who will be contributing at least N20,000 every month, we will raise N2.4 trillion in a year.

 

On top of this, we can receive donations from the state governments, NGOs and international agencies, and foundations. Nigerians in the southern region might wish to contribute as well.

 

The local government branches of the Forum should maintain education and development statistics and a database of the people under their jurisdiction. The information will help for the appropriate allocation of these resources.

 

There should be a new law that will convict any person or their parent for not acquiring a minimum of secondary school education in the North. The Education must be compelled and made free for all.

 

Banditry and all kinds of terrorism are ideologies. Ideologies are groomed by certain circumstances, and they can travel everywhere. The only thing that prevents it is education.

 

Only education and empowerment can fix insecurity. If we don’t come together to kill this ideology, it will kill us. It is now time to stop expecting too much from the government. We have to rise and do it ourselves.

 

It is not surprising that Northern Nigeria is facing this level of insecurity because despite being the region with the highest population growth rate (with an average woman giving birth to six children), more than half of the girl children aged six and above are not having an education.

 

The region also accounts for 9 million of the 14 million out-of-school children in Nigeria, with the northwest alone having five million of them. Northern Nigeria's poverty rate is put at 86%. Any region that has a high level of poverty and lack of education like this has fulfilled the conditions for insecurity.

 

Traditional rulers have to be actively involved in information and intelligence gathering. They are closer to the people; they could provide relevant information and strategies unique to their territories.

 

War should be declared in the affected areas. A large number of Nigerian armies should be deployed and given the order to clear the terrorists and ensure peace in the region.

 

Ultimatum could be given to some of the terrorists who are willing to lay down their arms unconditionally, beyond this chance should be death. There should be immediate rebuilding and infrastructural development of the areas where these bandits come from so that they will have options of a new life in their towns or face death.

 

Finally, the APC administration must fix insecurity before the 2023 elections, because the APC and President Buhari were voted mostly to fix insecurity. The next administration should not inherit another insecurity challenge.

 

The next administration should focus on addressing other issues. We cannot afford to waste a complete eight-year tenure of an ex-Army General without addressing insecurity in Nigeria.

 

I call on all Nigerians to take responsibility and act, we should stop relying absolutely on the government to fix insecurity.

 

If you do have other ideas on how to fix insecurity or you want to respectfully challenge or support my submissions above or my previous article on the subject matter, you can send me an email. 

 

Ahmed Adamu, PhD

ahmadadamu1@gmail.com