Analysts weigh potential effects of Naira-for-crude policy on economy

• Policy has stabilised Naira, reduced petrol price- Yusuf
• DAPPMAN kicks, says policy will affect economy negatively on the long run

Onome Amuge

Nigeria’s oil sector finds itself engulfed in a frenzy of stakeholder consultations in an attempt to maintain the stability of the downstream petroleum market, as the naira-for-crude policy’s initial six-month agreement nears its expiration at the end of the month.

While the naira-for-crude policy initially offered promising benefits for Nigeria’s refining capabilities and overall economic development, recent events have triggered an intense dialogue among industry insiders, generating divergent views on the policy’s impact on the Nigerian economy.

The federal government, in an effort to stimulate the domestic refining sector and promote the usage of the naira, implemented a pilot naira-for-crude policy, with Dangote Refinery serving as the initial recipient of crude oil in exchange for the national currency.

The initiative aims to boost the economy and incentivise investments in the domestic oil refining sector, while also supporting the value of the naira and encouraging its wider adoption in the industry.

However, in the past few weeks, mounting concerns surrounding the sustainability of the naira-for-crude policy have ignited a wave of responses across the Nigerian oil sector, culminating in Dangote Refinery’s temporary suspension of its naira-based petrol sales to the domestic market.

Also, some stakeholders have raised concerns that the policy’s continuation beyond the initial six-month period could necessitate additional approvals, generating uncertainty and spurring further debate on the future of the policy.

Meanwhile,  Zach Adedeji, the chairman of the technical sub-committee on the Naira-for-Crude policy, remains confident in the policy’s continued benefits for the Nigerian economy, insisting that it will remain in place.

“The naira-based crude sales framework remains intact. There are no plans to discontinue this important economic initiative. This framework promotes competitive pricing and efficiency in the domestic crude market,” Adedeji stated.

Over the past four months, the price of petrol has witnessed a steady decline, dropping to a recent low of N860 per litre at the retail pumps, delighting consumers and alleviating some of the fuel scarcity and supply challenges that have historically plagued the country.

The National Bureau of Statistics (NBS), in its recent inflation data report, noted that the recent reduction in logistics costs, particularly the decrease in transportation costs fueled by the improved petrol prices, served as a significant contributor to the overall decline in inflationary pressure in Nigeria.

As it stands, the future of the naira-for-crude policy has sparked a debate among experts as opinions remain divided on the potential implications of its discontinuation.

This is as some analysts have warned that the termination of the naira-for-crude policy could cause disruptions in the market, potentially reversing the gains made in petrol pricing and destabilising the delicate balance achieved by local refining and deregulation, just as Dangote Refinery has hinted at.

On the other hand, others contend that the market may not experience significant disruptions due to its current deregulated status, which allows for self-adjustment to economic conditions.

According to industry expert Mayowa Sodipo, the question of whether or not to continue the naira-for-crude policy should not even be up for debate, given its positive impact on the economy.

He noted that the policy has helped to drive down petrol prices by fostering healthy competition within the sector, as well as strengthening the naira by reducing the need for refiners to procure crude oil using foreign currency.

With petrol prices falling and the naira strengthening against other currencies, Sodipo argued that there is ample evidence to support the continuation of the policy and its benefits for the Nigerian economy.

Muda Yusuf, the chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE), stated that the discontinuation of the naira-for-crude policy will have a negative impact on the domestic pricing of petroleum products.

According to Yusuf, the withdrawal of the policy will change the market dynamics, potentially altering the relationship between the exchange rate and petroleum product prices. He cautioned that while the policy has facilitated the stabilisation of petrol prices recently, its termination could lead to increased volatility and uncertainty in the market.

“The sustainability of the widely celebrated deceleration of petroleum products prices will evidently be at risk. We may see a reversal of the trend,” he warned.

Extending his analysis, Yusuf stated that the potential consequences of terminating the naira-for-crude policy extend beyond pricing dynamics to encompass broader macroeconomic implications.

He predicted that demand for foreign exchange would intensify, leading to potential depreciation of the naira and putting more pressure on Nigeria’s foreign reserves. He added  that these adverse macroeconomic outcomes could severely undermine investor confidence.

Adeola Yusuf, an energy expert and industry analyst, in his assessment, concurred with the notion that Dangote Refinery’s entry into the deregulated market has fundamentally altered the dynamics of petrol pricing.

Yusuf acknowledged that President Bola Tinubu’s commitment to total deregulation of the downstream oil sector, which was announced on May 29, 2023, has paved the way for continuous adjustments in petrol prices, as the market adapts to the new realities of the sector.

Yusuf, however, eased concerns about possible upward price adjustments in the petrol market, reasoning that Dangote Refinery’s suspension of naira-based sales would only impact petrol prices at oil markets that rely on the refinery’s supply.

He explained that the price increases, if any, would be passed on to these specific oil markets, which would then adjust their prices to reflect the cost of purchase from the refinery.

“An upward review will be immediately imminent at filling stations of marketers that get supply from the Dangote Refinery if it adjusts its price and this will trickle down to filling stations that get supply from it.

“It may, however, be difficult to generalise the review at other stations that get supply elsewhere. Remember that this is a deregulated market; so consumers have a choice where to buy the products depending on the price offering,” he explained.

Meanwhile, the Depot and Petroleum Products Marketers Association of Nigeria (DAPPMAN), argued that the naira-for-crude oil transaction framework poses substantial risks to Nigeria’s foreign exchange stability and could discourage Foreign Direct Investment (FDI).

Olufemi Adewole, the executive secretary of DAPPMAN, highlighted the naira’s volatility as a major concern, stressing that crude oil transactions typically occur in dollars due to its global status and relative stability.

In light of this, Adewole cautioned that diverging from the international norm of dollar-denominated transactions could lead to Nigeria’s isolation from global markets, reducing trade opportunities and potentially hampering foreign investment inflows.

“The global oil market operates in U.S. dollars due to its stability. Continuing the policy could alienate trade partners and investors who rely on the predictability of the dollar,” he said.

Adewole emphasised the importance of designing policies that cater to the specific needs of the oil and gas industry, in order to maintain the country’s competitiveness on a global scale.

He cautioned against reactive policies that may unintentionally create uneven economic benefits, primarily favoring select industry players at the expense of the larger economy.

Furthermore, he contended that tying crude oil transactions to the Naira could amplify these challenges, potentially jeopardising Nigeria’s long-term economic interests and growth potential.

Adewole underscored the historical instability of the Naira, characterised by inflation and fluctuating exchange rates, noting that if crude oil transactions were to be conducted in Naira, these issues would be further aggravated, potentially leading to capital flight and a flight of foreign investors to more stable markets.

In his opinion, this shift in the oil and gas value chain would have a detrimental effect on Nigeria’s economic growth, not only jeopardising the long-term sustainability of the industry but also compromising its efficiency.

The DAPPMAN executive secretary further warned that conducting crude oil transactions in Naira could impose an unsustainable burden on Nigeria’s foreign exchange reserves.

He cautioned that the Central Bank of Nigeria (CBN) might encounter difficulty in stabilising the currency in the absence of sufficient dollar inflows, potentially causing further economic pressure.

While advocates of the naira-for-crude policy have stressed the potential benefits of increased economic sovereignty and a stronger local currency, Adewole emphasised that policy decisions should place primary emphasis on sustainable economic impact.

He argued that while short-term gains might be possible through the adoption of Naira-for-crude transactions, policymakers should focus on making decisions that are not only beneficial in the immediate term, but also foster long-term stability and growth for the Nigerian economy

“DAPPMAN supports all efforts and policies aimed at strengthening the Naira. However, these strategies must be capable of driving major economic reforms that address the underlying causes of the Naira’s weakness.

“Nigeria must strike a balance between national interests and global market realities. Economic policies are most effective when they are not shaped by sector-specific demands but rather by long-term economic sustainability,” he noted.

Adewole supported his stance by pointing to Venezuela’s unsuccessful experiment with local currency-based oil transactions in the early 2000s, which ultimately led to severe economic destabilisation.

Drawing lessons from Venezuela’s ill-fated attempt, Adewole suggested the need for policies that align with international market realities, noting that such policies are essential for ensuring long-term economic stability and prosperity in Nigeria

Adewole emphasised that Nigeria’s oil and gas sector can only thrive through pragmatic policies that promote investment, encourage transparency and competition in the sector, and safeguard the country’s foreign exchange reserves.