Reason: the zero provision for fuel subsidy in the recently passed 2015 budget has placed bankers and oil marketers on the alert — financing imports of petrol and kerosene is now tagged “political risk”.
This has worsened the shortfall in fuel supply despite claims by the Nigerian National Petroleum Corporation (NNPC) that there is enough in stock.
Recent payments to marketers were sourced from a loan taken by the federal government, a development that effectively shook the confidence of the financial system on the immediate future of subsidy in the country.
As a result, most oil marketers have decided against importing fuel until the incoming government settles in and defines its direction on the deregulation of the downstream sector.
An industry source disclosed that: “We are stuck on all sides. The banks are unwilling to fund fuel importation because they do not want to take any risks that have political implications. They have classified it as political risk. They are not sure the incoming administration will be eager to pay up on subsidy, especially with the impression that it is all a scam.
“We are also stuck because we would rather have the incoming administration deregulate the sector so that we can run a market-based system, but nobody is sure of what the president-elect (Muhammadu Buhari) has in mind. This is the period of uncertainty and nobody wants to take a reckless plunge.”
He said many marketers ran into a crisis when the pump price was reduced in January by President Goodluck Jonathan because the naira was also devalued around the same time. A typical fuel import order operates on a 90-day cycle and many marketers who placed orders in December 2014 were caught out. Whereas they took loans at N158 to $1, they had to start paying back at N200 following the devaluation. This was worsened by the fact that they had to then sell at a lower pump price of N87 in January.
An official of the ministry of finance, who declined to be named, said the fall in the value of naira and the increasing crude oil price have “made the situation more difficult than we thought”.
The source said: “Before the pump price of PMS was reduced to N87 per litre in January, crude oil price was a little over $50 per barrel. Ideally, it was the right time to deregulate so that the market could take care of itself and people would naturally see the sense in freeing the downstream sector from price controls.
“However, deregulation was the last thing you wanted to discuss within the political context at the time. Rather, the federal government came under pressure to reduce the pump price as was being done globally.
People did not reckon with the fact that the exchange rate was under pressure because of the elections, so while we were gaining from lower crude oil price in terms of lower fuel import cost, we were losing because the naira had been devalued.
“All said and done, the subsidy remained. Today, crude oil price is over $60 per barrel, so the cost of importation has risen. The exchange rate has not improved. While the pump price is fixed at N87 per litre, the landing cost is a staggering N129.60,according to the PPPRA template. That means we are paying subsidy of at least N42.60 on every litre of PMS.”
Recently, the ministry of finance paid marketers N156 billion arrears as part of measures to encourage them to keep importing, but the crisis has even escalated.
The payment had two components: N100 billion IOU which the marketers were given in March and N56 billion in interest payments. The “interest payments” are meant to offset the cost of funds incurred by the delay in reimbursement of subsidy as well as the differentials in exchange rate.
Despite oil marketers being paid over N500 billion between December 2014 and now, they are still being owed N98 billion. Technically, the marketers are not losing on the basis of falling exchange rate and accumulation of interest payments because the subsidy regime allows for the recovery of those costs.
However, the delay in payment, according to the industry source, causes cash flow problems and unsettles the banks who are “mortally afraid” of a major debt crisis if the Buhari administration takes a drastic action on the payment of the arrears left behind by Jonathan.
“Many banks had their fingers burnt in 2008 when they gave us loans and the naira was devalued. Moreso, risk management is on the front burner now.
A new CBN governor came in 2009 and sacked bank chiefs on the basis of poor risk management. No bank MD wants to experience that again,” he said.