Think tank urges FG to scrap domestic crude allocation to stabilise naira, shore up FX reserves 

Onome Amuge

In an effort to find workable solutions to pressing national challenges, Agora Policy, a Nigerian think tank committed to finding practical solutions to urgent national challenges, has urged the federal government to cancel the domestic crude allocation (DCA) policy, which it argues has been a drain on the economy and has done little to help stabilise the naira. 

The term DCA refers to a practice where a country sets aside a portion of its oil production for domestic consumption. This oil is not exported, but instead remains in the country to be refined and used for domestic purposes as a way to ensure that a country has a steady supply of oil for its own needs.

Agora policy in its first memo of 2024 titled “Cancelling Domestic Crude Oil Allocation is Nigeria’s Surest Path to Easing Forex Supply Crunch”, expressed concern over the ongoing forex supply crunch in Nigeria and the impact it is having on the country’s national currency, the naira. The memo outlines the challenges facing both the official and unofficial forex markets, which are largely related to a lack of liquidity and forex flow. Agora Policy notes that while a number of initiatives and ideas have been proposed to address the situation, many of these are centred around borrowing or finding ways to incentivise portfolio flows. The memo argues that these measures may be insufficient and that a more fundamental solution is needed.

In its analysis, Agora Policy states that the cancellation of the policy of domestic allocation of oil output would not only increase forex flows, but would also have positive impacts on oil revenue and investment in the oil sector. With greater revenues from oil exports, the government would have greater resources to invest in other areas, such as infrastructure and social welfare programs. This in turn could lead to further economic growth and increased investment in the country’s oil sector. Agora Policy argues that these effects would be felt in the short term and would be sustainable over the long term.

Agora Policy is of the view that to truly resolve the forex supply crunch, the government must act immediately to scrap the policy of allocating crude oil for domestic use. It noted that while improving security and attracting investment are important long-term goals, the impact of these measures may take time to be felt. On the other hand, canceling the policy of domestic allocation would have an immediate and direct effect on forex flows, which would help to stabilize the naira and mitigate the negative effects of the forex shortage. 

The memo stated, “Of all the options being implemented or considered for boosting forex inflow into Nigeria, cancelling what is termed Domestic Crude Allocation (DCA) is Nigeria’s surest bet. This will yield immediate result and provide a steady (not one-off) flow of foreign exchange—and thereby address the cashflow challenge in the official segment of the forex markets. 

Additionally, it will end the dodgy deductions and accounting associated with the domestic crude allocation policy that has been aptly described as an active crime scene.

The DCA has acquired an outsized profile of recent. Any serious attempt at understanding and reforming how Nigeria’s share of oil is accounted and paid for must, for a number of reasons, zero in on the management of and the recent prominence of the DCA.”

Agora Policy  highlighted that Nigeria’s declining oil production and shift away from Joint Ventures (JVs) to Production Sharing Contracts (PSCs) has resulted in an increase in the percentage of the country’s share of oil production that is allocated for domestic consumption (DCA). This has had a major impact on forex flows, as the revenue generated from DCA is received in Naira, rather than foreign currency. As a result, the Central Bank of Nigeria (CBN) is not receiving the steady and robust flow of forex that it once relied on from oil and gas sales. 

The think tank also highlights the fact that, despite the significant percentage of crude oil sales that are still exported, the policy of allocating a greater share of crude oil for domestic consumption means that a large proportion of the revenue from oil exports is not in the form of dollars, but rather in the form of naira. It pointed out that this has implications not only for the CBN, but also for the federation account, which is the central government’s main source of revenue. This is as the lack of dollars entering the federation account means that the government has less money to fund its activities and may have to borrow more, leading to higher levels of debt. 

Agora Policy also alleged that the national oil company has always been in the habit of making upfront deductions for sundry reasons from revenue accruing from the DCA, adding that the DCA is the site where NNPC performs its ‘dark magic’.

“Crucially, the DCA policy not only provides an insight into why the national oil company failed to make remittances to the Federation Account for a long spell but also explains why forex inflows from sales of Federation’s crude oil dwindled and the country’s external reserves stagnated at a period of historically high oil prices,” it  added.

The memo further explained that while there are a number of measures that countries with low forex supply against demand can take to increase foreign exchange inflows, each of these options comes with its own challenges. For example, loans are only a temporary solution and often come with interest payments. Investors can be fickle and take their time to commit to a country. Additionally, unlocking other sources of exports can take time and requires a significant amount of effort. 

According to Agora Policy, while the Nigerian government should continue to explore other options for increasing forex inflows, the most impactful and sustainable solution would be to cancel the policy of domestic crude allocation. The memo stressed that this solution is within the control of the government and can be implemented quickly, unlike other options such as attracting FDI or increasing exports, which require time and effort. It also highlighted the need for the government to develop a comprehensive strategy for boosting forex inflows, in addition to cancelling the DCA.

In its analysis, Agora Policy states that the recent developments in the Nigerian oil industry, particularly the removal of petrol subsidies and the Petroleum Industry Act, make the continuation of the DCA even more untenable. With the Dangote Refinery set to come online soon and the Port Harcourt Refinery being repaired, it is clear that there will be less need for domestic crude allocation in the near future. The memo also highlights the fact that the DCA is not bringing in any forex for the Federation, as it is paid in naira. 

In addition to the legal issues surrounding the DCA, the memo states that the policy is also impractical given the increasing domestic refining capacity in Nigeria. As the country becomes more self-sufficient in terms of refining crude oil, the need for the DCA will continue to diminish. This means that not only is the DCA bad policy from a legal perspective, but it is also not sustainable in the long term. The memo also notes that it is necessary to highlight the caveat of the removal of petrol subsidies and the implementation of the PIA when discussing the future of the DCA.

“We submit that the DCA has outlived its usefulness, and its continued use has proved costly to the country, especially for inflows of foreign exchange, thereby hurting the Naira. We recommend ending the DCA and selling Federation’s crude oil for exports, or if sold domestically to private refineries, to be sold in dollars,” Agora Policy advised.

According to Agora Policy, if the DCA is cancelled and the country continues to move towards self-sufficiency in oil refining, there will be a steady inflow of foreign exchange that can help to stabilize the naira.