Petrol Price Reduction to ₦125/Litre… Laudable yet Questionable

Reeling from the current disruptions caused by the COVID-19 pandemic, fiscal and monetary policymakers are announcing measures to support the economy. The FG through the Petroleum Products Pricing Regulatory Agency (PPPRA) reduced the price of petrol for the first time since 2015 to ₦125.0/litre from ₦145.0/litre, effective March 19, 2020.

The sustained decline in oil price to an 18-year low of $22.85/bbl prompted the review of PPPRA’s pricing template, with Ex-Coastal price reviewed to ₦99.4/litre from ₦117.6/litre while the Ex-Depot price was adjusted to ₦113.3/litre from ₦133.3/litre. The implication is that the FG is currently not subsiding petrol consumption and the exchange rate assumption now reflects the market price of ₦360/$1.00.

In our view, the decision to pass down lower petrol importation costs to consumers is timely as it would support consumer spending during a crisis. The decision also reflects the benefit of adopting cost-reflective prices. However, we are not optimistic that it would translate to massive gains for the most vulnerable groups who are less dependent on petrol consumption and given that transport and general consumer prices are sticky downward. Given the potential negative impact of COVID-19 on government revenues, we believe retaining the price at ₦145/litre would help the FG collect more resources that can be redistributed to target the most vulnerable groups.

Also, we are reluctant to think that the price adjustment represents a shift to a deregulated downstream sector. Although the PPPRA hinted that petrol price would be adjusted monthly going forward, this is similar to 2016 when the price modulation template was introduced but the price was retained at a peg of ₦145/litre for almost four years.  In our view, the true test to the new pricing regime would emerge when oil prices are rising and the currency is weakening as well as how soon downstream players can resume importation. As lower oil prices and capital outflows persist, FX devaluation is gradually becoming inevitable in the short-term. Meanwhile, given the prospect of declining FX flows and the risks to the economy, we are not optimistic that petroleum marketers would have easy access to FX and credit lines to resume importation.

Transitioning to a Uniform Exchange Rate Regime?
The new pricing template of the PPPRA assumes an implied exchange rate closer to the market rate of ₦368/$1.00 at the I&E FX window rather than ₦306.95/$1.00 at the official window. In our view, this suggests the convergence of the various exchange rate windows, which is even more necessary to remove distortions due to the current FX pressures. However, we note that this is yet to be communicated officially by the CBN. As the current transactions at the official exchange rate are mostly government-related and daily sales to the interbank are low at $100,000 according to the IMF as at 2019, we believe there are more gains from the transition. This would help boost government oil receipts and lessen the pressure on FX reserves even if marginally.   

February 2020 CPI Report: Inflation Rises to a 22-Month High of 12.2%
The Consumer Price Index report for February 2020 showed that headline inflation increased to a 22-month high of 12.2% Y-o-Y, from 12.1% in the previous month. The marginal rise in inflation suggests that the recent VAT increase is yet to be fully captured. Similarly, core inflation rose to 9.4% from 9.3% and food inflation was higher at 14.9% from 14.85%. The broad-based rise in inflation was despite a general moderation on M-o-M basis for the first time since August 2019. M-o-M headline inflation moderated by 8bps to 0.8%. Core inflation was down by 9bps to 0.7% while food inflation eased 12bps to 0.9% M-o-M. Imported food inflation, on the other hand, remained unchanged M-o-M but rose by 16.1% Y-o-Y.

We suspect that the M-o-M moderation in consumer prices in February reflects the thinning-out effect of festive season purchases and land border closure. However, we believe this would be short-lived once consumer prices fully reflect the recent VAT increase. In addition, as a fallout from the effects of the COVID-19 pandemic, we expect exchange rate pressures and supply chain disruptions with trade partners to impact domestic consumer prices in the coming months.