HOW PETROL AND FOREIGN EXCHANGE RATES EFFECT PRICE

In the foreseeable future, economists are confident about price stability and a steady decline for Premium Motor Spirit (PMS) or gasoline. Although the removal of the commodity's subsidy has caused the price of gasoline to reach an all-time high, they expressed confidence that with the ongoing reforms in the crucial sectors gradually taking shape, Nigerians will soon start to notice the effects in not only the price of gasoline at the pump but also in other areas of the economy.

Investment bankers recently predicted that the naira will strengthen to between N550 and N600 to the dollar by year's end. However, it is also anticipated that at this time, gas prices will decrease. This is so because the price importers pay for gasoline directly depends on the value of the naira relative to the dollar.

In different conversations with The Nation, economists and financial experts stated that the US dollar's rising exchange rate to the naira is due to the latter's dearth. They claim that the nation has been protecting its currency against the dollar for a very long time, which has caused the dollar's depletion.

According to their numerous comments, harmonizing the exchange rates is a plan to bring in more foreign exchange, which, at a certain point, will support the value of the local currency because there will be more USD available. According to economist Mayowa Sodipo, “this will invariably result in the importation of gasoline at a cheaper exchange rate and the market will equally respond in like manner in terms of pump price.”

He asserts that there is a connection between the exchange rate and the cost of crude oil on the world market. The West Texas Intermediate (WTI) sold for $77.07 a barrel over the weekend, while Brent crude was sold for $81.79 per barrel. He added that such an increase has two disadvantages. Despite being a blessing for the nation, he said, Nigeria's reliance on petroleum imports means that any gains from the increase are offset by the importation of refined goods.

Dr. Muda Yusuf, the chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE), said that the pump price depends on both the price of crude oil and the exchange rate, particularly at this time when the nation is still importing petroleum products. He continued by saying that the importation of petroleum items would be impacted by whatever occurred to the exchange rate.

Similar to this, Chinedu Okoronkwo, President of the Independent Petroleum Marketer Association of Nigeria (IPMAN), cautioned that if the government's approach, particularly with regard to the unification of the currency, succeeds, then the price of gasoline will eventually follow suit.

If the exchange rate policy is successful, everything will start to decline. You are aware of our reliance on imported petroleum, but I can guarantee you that if the value of the naira rises versus the dollar, prices will fall as well. Additionally, this will promote healthy competition, which will bring forth the best in any system, according to Okoronkwo.

The country's oil production output capacity needs to be dramatically increased right away in order to increase export revenues and stabilize the local currency while also providing the necessary support for the exchange rate.

Afrinvest West Africa Plc's investment bankers also provided advice on how to strengthen the naira, which invariably results in lower gasoline prices.

Ike Chioke, the managing director of Afrinvest West Africa Plc, stated that in order to improve fiscal consolidation and draw investors to the economy, it is necessary to prevent waste and economic sabotage. He added that in addition to automating the tax collecting process across the key revenue-generating institutions, the government could reassess the exchange rate regime to ensure a stronger and stable naira. Chioke continued by stating that in order to support the expansion of the private sector and the diversification of the economy, the government must also identify and prioritize key industries for radical organizational change and enterprise transformation.

Abiodun Keripe, the managing director of Afrinvest Consulting, stated that the elimination of the gasoline subsidy is anticipated to result in budgetary savings of N2 trillion in 2023. This would boost revenue together with gains from increased oil exports and non-oil sources.

“More interesting is also the impact of FX unification on the reduction of government deficit by about N350 billion, which is a greater gain from oil revenue vis-à-vis increase in external debt service,” the speaker remarked.

Keripe claimed that since May 2022, the Central Bank of Nigeria (CBN) has increased the monetary policy rate by 700 basis points and the cash reserve ratio by 500 basis points in an effort to curb growing inflation.

However, he pointed out that the monetization of the fiscal deficit through pricey Ways and Means advances and the CBN's provision of development funding at discounted rates have reduced the effectiveness of monetary policy in containing inflationary pressure. The addition of the Dangote Refinery, according to Financial Derivatives Company Limited's Managing Director, Bismarck Rewane, would raise foreign exchange reserves and promote growth by boosting revenue creation and domestic productivity.

He said that the NNPC Limited, which would also be listed on the Nigerian Exchange allowing Nigerians to acquire stake from the company, had acquired the 20% stock that the Dangote Group had previously owned in the refinery. He contends that allocating a portion of the nation's daily crude oil production to the Dangote Refinery for processing for domestic use will eventually lead to even lower pump prices because domestic production and sale will be less expensive, and the nation's export earnings will rise, providing the government with more income.

Dr. Olumide Emmanuel, chief executive of the Common-Sense Group, observed that the FX unification will eventually make most things easier because it will ensure that people bring their money in, which means that the naira will finally strengthen.