Nigeria: Hike in Price of Diesel Worsens Nigeria’s Economic Woes

Nigeria: Hike in Price of Diesel Worsens Nigeria's Economic Woes -  allAfrica.com

Culled From Daily Trust

Even as the organised labour and the federal government continue their engagement on what the appropriate price of petroleum motor spirit (PMS), otherwise known as petrol should be, oil marketers in the country Thursday raised the price of diesel to between N275 and N290 per litre, up from between N220 and N245 it was in February.

The recent increase, the fifth in the last 12 months, was caused by the increase in global crude oil prices and naira devaluation, according to marketers.

And with crude oil price moving northward (hit $76/barrel Friday morning), diesel price in the country may continue to go up, experts have said.

In July 2020, the price of diesel across Nigeria was between N238.43 (mostly in the North-East) and N212.39 (mostly in South-East), while in January 2021, the price increased to N241.24 at many filling stations in the North. However, the price came down in the southern part of the country as diesel was sold at N210.17.

In February, some filling stations in Lagos increased the diesel price to N250 per litre, while many others sold it between N220 and N245 per litre, according to media reports.

It was further increased to N280 two weeks ago. Thursday’s increase was the fifth in just one year.

Though the price of diesel, otherwise known as automotive gas oil, had long been deregulated, meaning that marketers have the right to fix price according market forces, the recent increase to N290 per litre on Thursday caught many manufacturing companies unawares. This is because they are already grappling with high production cost and low sales. The manufacturers rely mostly on the automotive gas oil to power their generating machines amid lack of reliable power supply from the national grid.

The Manufacturers Association of Nigeria (MAN) said self-generated electricity gulped 30 per cent of the production cost by its members.

The MAN’s director-general, Mr Segun Ajayi-Kadiri, who disclosed this while addressing participants at the Global Environmental Facility-United Nations Industrial Development Organisation (GEF-UNIDO) project inception workshop in Lagos on Thursday, said the cost of sourcing energy from the national grid had not been business-friendly either.

Kadiri, however, said energy management systems and optimisation could sustainably reduce manufacturers’ energy consumption and cost.

An Abuja economic expert, Simon Samson Galadima, said any hike in the price of diesel would reverberate across the entire economy.

According to Galadima, the high inflation experienced at the moment will get worse, particularly the non-core inflationary pressure, with the increase in diesel price.

“Harvest season is upon us, so we expect food price to ease. Be that as it may, any good food price fall may likely be offset by energy inflation,” the expert said.

But he said subsidising the price of diesel was not the way to go as scarce resources are not being used optimally by the government.

He said, “The best approach should be opening up the energy sector. Reducing the stranglehold by the government and a few players does bode well. Furthermore, providing alternative means of transportation, boosting production will be a way to compensate for any increase due to subsidy removal.

“The increase will undeniably be tough. Nonetheless, subsidy is not an option. I believe the dependence of firms on generators run by diesel is the problem. Consequently, I will suggest going for alternative energy sources.”

He also said the power sector should be fully liberalised. Government should hand it off totally and competence players the world over should be incentivised to come in.

Also speaking on the diesel price hike, a petroleum industry expert and analyst, Suraj Oyewale, said diesel remained an important source of fuel in Nigeria, especially in the industrial sector; hence any increase in its price will touch every Nigerian.

“It is a major component of cost of production in Nigeria. So it is natural that when cost of diesel increases, cost of production increases and manufacturers are usually left with no other option than to increase the prices of goods.

“It is not only the manufacturing sector that gets the hit, even the service sector is impacted as many offices run on diesel-powered generators. So, the effect of rise in price of diesel is very far reaching,” Oyewale told Daily Trust on Sunday.

However, he said diesel market was already deregulated and introduction of subsidy would mean returning to the era of regulation.

He added, “At a time when the country is trying to disentangle itself from the grip of regulated pricing for PMS, bringing another product into the price control bucket will aggravate the problem.”

He said natural gas was a cheaper alternative to diesel as a source of energy for manufacturers, but only the larger manufacturers had been able to adopt this energy source due to limited gas distribution network in Nigeria.

This is one area the government and manufacturers could look at to mitigate the issues and stay in business, he said.

A former director-general of the Lagos Chamber of Commerce and Industry, Dr Muda Yusuf, said the high diesel cost was taking a huge toll on operating and production costs across sectors.

According to Yusuf, the recent increase is a case of multiple jeopardy for businesses as the purchasing power had been weak and the exchange rate of the naira to the dollar had depreciated sharply.

The Central Bank of Nigeria (CBN) recently devalued the naira as it adopted the NAFEX exchange rate of N410.25 per dollar as its official exchange rate, days after removing the N379/$ rate from its website.

“There is foreign exchange market liquidity. The cargo clearing at our seaports is a nightmare. The security situation has inflicted an elevated risk to investment,” Yusuf said.

He added that diesel cost also had profound implications for transportation and logistics costs.

He said, “Most of the trucks that move freight across the country are powered by diesel. The consequences are that sales are dropping, inflationary pressures will intensify, profit margins are being eroded and industrial capacity utilisation will drop.

“Elevated pressure on general price level exacerbates the poverty situation in the economy.”

Similarly, a big grocery distributor in Abuja, Umar Abdullai Mukhtar, said the diesel price hike would result in low sales for people like him.

“The prices of goods will be increased by the companies producing them. And this is simply because about 90-95 per cent of industries rely on diesel to power their machines,” Mukhtar said.

He believes the government should subsidise the diesel price because not doing that may spell doom for the manufacturing sector.

“The continued price hike can kill industries, particularly small and medium enterprises,” he said.

A civil servant who pleaded anonymity said salaries of many Nigerian civil servants could no longer ” do any meaningful things” as inflation rises almost every quarter.

She added that the diesel price hike would cause further increases in the prices of commodities.

But a member of the Major Oil Marketers Association of Nigeria (MOMAN), Ajala Marufdeen, said market forces determined the price of diesel, and the price would come down according to such forces.

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