In a strategic move to bolster the Nigerian economy and strengthen the local currency, the Federal Government has mandated the Nigerian National Petroleum Company (NNPC) to sell crude oil exclusively in naira to the Dangote Refinery and other upcoming domestic refineries. This decision is part of broader economic reforms aimed at reducing dependency on foreign exchange and promoting local economic activities.
Policy Announcement
Official Statements
Bayo Onanuga, the Special Adviser to President Bola Tinubu on Information and Publicity, announced the Federal Executive Council’s (FEC) decision on Tuesday. He highlighted that the council adopted a proposal to sell crude oil to the Dangote Refinery and other future refineries in naira. This initiative aims to stabilize the naira and minimize the pressure on Nigeria’s foreign exchange reserves.
“Dangote Refinery at the moment requires 15 cargoes of crude, costing approximately $13.5 billion annually. NNPC has committed to supply four of these cargoes,” Onanuga stated on his social media account.
Framework and Implementation
The policy specifies that 450,000 barrels of crude oil intended for domestic consumption will be offered in naira. The Dangote Refinery will serve as the pilot for this initiative, with a fixed exchange rate for the duration of the transaction. Afreximbank and other settlement banks in Nigeria will facilitate the trade between Dangote and NNPC, eliminating the need for international letters of credit and saving the country billions in foreign exchange costs associated with importing refined fuel.
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Economic Rationale and Benefits
Reducing Foreign Exchange Pressure
Zacch Adedeji, the Chairman of the Federal Inland Revenue Service (FIRS), also confirmed the move, emphasizing the economic benefits. He explained that the current system, which requires about $660 million (₦7.92 billion) to procure crude oil, exerts significant pressure on Nigeria’s foreign exchange reserves. The new policy aims to reduce this pressure by about 90%.
“With effect from today, NNPC will sell crude oil to local refineries and engage with them on the basis of local currency,” Adedeji announced. “This will reduce pressure on the naira and save finance costs amounting to approximately $79 million.”
Promoting Economic Predictability
Adedeji also noted that the policy would enhance economic predictability by stabilizing the exchange rate and reducing the country’s reliance on foreign currency for essential transactions. This stability is expected to foster a more predictable economic environment, encouraging both local and foreign investments.
Role of Afreximbank and Settlement Banks
Facilitation of Trade
Afreximbank will play a crucial role as the settlement bank for these transactions, ensuring that the trade between NNPC and the Dangote Refinery is smooth and efficient. The involvement of Afreximbank and other Nigerian settlement banks will facilitate the process, further eliminating the complexities and costs associated with international financial transactions.
Eliminating International Letters of Credit
The removal of the requirement for international letters of credit is a significant advantage of this new policy. It simplifies the transaction process, reduces costs, and enhances the speed of transactions. This is particularly beneficial for the Dangote Refinery, which requires a substantial volume of crude oil to meet its production needs.
Implications for the Nigerian Economy
Boosting the Naira
By conducting significant transactions in naira, the policy directly supports the local currency. This approach reduces demand for foreign exchange, thereby helping to stabilize the naira. A stronger naira can lead to lower inflation rates and improved purchasing power for Nigerian consumers.
Enhancing Domestic Refining Capacity
The policy is also expected to boost the domestic refining capacity. By ensuring that local refineries like Dangote have a steady and affordable supply of crude oil, the policy encourages increased production of refined petroleum products within Nigeria. This reduces the need for imports, supports local industry, and creates jobs.
Long-Term Economic Stability
In the long run, this policy is anticipated to contribute to greater economic stability and resilience. By reducing the country’s reliance on foreign exchange and promoting local economic activities, Nigeria can build a more self-sufficient and robust economy.
Conclusion
The Federal Government’s directive for NNPC to sell crude oil to the Dangote Refinery and other domestic refineries in naira marks a significant shift in Nigeria’s economic strategy. By focusing on local currency transactions, the policy aims to strengthen the naira, reduce foreign exchange pressures, and promote economic stability. With the involvement of Afreximbank and other settlement banks, the implementation of this policy is expected to be smooth and efficient, paving the way for a more predictable and resilient Nigerian economy.
