Time for Deregulation of the Petroleum Downstream Sector

The Buhari-led administration took over power following a peaceful and successful election 12 months ago, with a promise to stabilize the economy, stamp out insurgency and put an end to corruption. Devastated by the mixture of tumbling oil prices in the global market and poor domestic management, the government inherited an economy on the edge of a cliff. Chief among the disquieting challenges confronting the economy at the time included insurgency in the North-east, currency market instability, energy crisis and deteriorating economic fundamentals. Thus, there were high expectations that the ‘Change’ mantra upon which the administration rode into power will come with good tidings soon.

Twelve months down the line, a review of the state of the economy suggests that while the new administration must be commended in terms of reducing the reign of terrorism in the North-East, much cannot be said about salvaging pressure on the economy. A look at key macroeconomic indicators suggests that GDP growth decelerated to 2.4%, 2.8% and 2.1% in Q2, Q3 and Q4:2015 respectively with an expectation for Q1:2016 performance to likely slip below 2.0%. The above is dampened by the IMF’s recently revised projection of 2.3% for FY:2016. Inflation rate has jumped to 11.4% in February 2016 relative to 8.5% in March 2015. The pressure on FX remains unabated as policy stance on the local unit worsens the already impaired outlook on the naira. Unemployment rate rose to 10.4% in Q4:2015 from 7.5% in Q1:2015 while improvement in electricity supply and other critical infrastructure remains hampered by policy constraints and delayed budget implementation.

In view of the aforementioned, we are particularly worried by the government’s handling of sensitive concerns in the economy. In our opinion, the persistent scarcity of fuel and worsening energy crisis in the country cast a dark cloud on the capacity of the administration to continue to enjoy the initial excitement that greeted its victory 12 months ago. In addition to FX related pressure mounted on the economy so far in the year, we imagine that the value of man hours wasted in filling stations will further weaken the pace of output growth in H1:2016. The continuous delay in the implementation of the 2016 budget and the poor fiscal and monetary policy responses to critical challenges in the economy also calls for concern given its pass through effect on macroeconomic aggregates in the medium to long term and the overall performance scorecard of the administration.

To pull the system out of the current economic conundrum, we believe the time for the administration to review its approach to solving the lingering energy crisis in the country is overdue. In our view, deregulating the downstream oil and gas sector remains the most efficient option. Meanwhile, the protracted challenges in the currency market requires more creative solutions as the ongoing fuel scarcity cannot be isolated from the difficulty in providing FX for importation of petrol to meet domestic demand. Apart from the continuous delay in the 2016 budget implementation, the government is yet to communicate a well-articulated economic plan to drive market expectation and stabilize the system. A plethora of progressive and reflationary monetary and fiscal policies need to be put in place.