News
What Nigeria Stands To Gain in Sales of Crude Oil in Naira – Experts
The Nation Newspaper
The momentous takeoff of crude sales in naira to refineries will have positive impacts across key economic sectors, experts said at the weekend.
According to them, the action will usher in a new era of stability and growth.
Following the Federal Executive Council (FEC) approval, Minister of Finance and Coordinating Minister of the Economy Mr. Wale Edun at the weekend confirmed the commencement of the “naira-for-crude, naira-for-products” transaction arrangement.
The Nigerian National Petroleum Company (NNPCL) Limited is now selling crude to local refineries in naira, using Dangote Petroleum Refinery as the pilot.
Economic and finance experts were unanimous yesterday that the commencement of the “naira-for-crude, naira-for-products” arrangement would have significant positive impacts on the country’s foreign exchange (forex) position, currency value, energy security and inclusive development of several sectors of the economy.
Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, described the domestic currency transaction arrangement as a “very good policy” that will have several multiplier effects across the sectors.
According to him, with the takeoff, Nigerians should expect reasonable stability in energy security and pricing as well as a reduction in naira volatility.
“First, it makes it easier for the government to ensure some level of influence on petrol pricing.
“The exposure of the sector to foreign exchange challenges, such as liquidity and volatility in foreign exchange (forex) for acquiring crude, has been very challenging.
“By taking this out of the equation, we provide an opportunity for domestic refiners to buy in naira, making the process much more seamless and enabling better management of product prices for social reasons.
“It may not sound well in the context of the economic conversation, but we need to consider the social context of our policies in the oil and gas sector, particularly as they relate to energy prices.
“The flexibility required to manage our energy prices, while being sensitive to the social environment, will be much easier with this arrangement. This is a major advantage.
“Secondly, this will ease the pressure on our foreign exchange market.
“If products are sold in foreign currency, the refineries would need to source their foreign exchange, which would exert enormous pressure on the foreign exchange market.
“If crude oil can be sold in naira, and we can ensure that all oil marketers buy refined petroleum products produced domestically, we are likely to see a significant easing of pressure on our foreign exchange markets.
“This could help strengthen the naira and improve our overall economic situation.
“With the introduction of naira transactions, we are likely to see increased investment in naira.
“The better our results, the more capacity the Central Bank of Nigeria (CBN) will have to support the naira, thus inspiring greater confidence in the country.
“From the standpoint of macroeconomic stability and the strength of our reserves, I believe this is a very good step,” Yusuf said.
He noted that while some may argue that if crude had been sold in dollars, the NNPCL would have received dollars, it makes better economic sense to localise the transactions and make the process work.
According to him, as the country’s capacity to produce locally increases, with the refineries, Nigeria can export refined petroleum products, which would yield more foreign exchange and provide better local value addition than simply exporting crude.
Said he: “Overall, I think this development is very positive for the economy. Our hope is that the NNPC can supply the desired amount of crude required by domestic refineries.”
Former President of Chartered Institute of Stockbrokers (CIS) and Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, said one of the immediate benefits of the transaction arrangement would be to reduce pressure on the foreign exchange market as the refiners and marketers will now produce and sell in the local currency.
According to him, the multiplier effects would ultimately have a positive impact on inflation as forex market stability reduces currency input to inflation.
Said he: “The general citizenry should also benefit from lower energy cost as forex volatility is removed from price that ultimately gets to the pump.
“An additional benefit from selling crude to local refineries in naira is that it serves as an incentive for other players to come into the industry and for present players to increase their capacity knowing that forex volatility risk has been removed from the supply chain through the ability to buy crude in local currency.
“We should expect more investments and significant competition in that space in the medium term and this could very well bring down local energy costs further.”
He noted that the possible pitfall of gap in forex accretion to reserves could be mitigated with a ramp-up in crude production.
The government has set a December 2024 target to increase crude production from the current average level of 1.52 million barrels per day (mbpd) to 2.0 mbpd, and subsequently to 3.0 mbpd.
Managing Director, APT Securities & Fund, Mallam Kasimu Kurfi, said the new arrangement would help in the development of the value-chain sectors, including pharmaceuticals, paints, chemicals and packaging, thus boosting economic prosperity and mass employment.
According to him, the country could channel forex saved from the transaction arrangement into other demands and stabilise the exchange rate.
“Once the exchange rate is stable, there will be more inflow of foreign direct investments (FDIs) into the country and the economy will be better for it,” Kurfi said.
He noted the need to further tighten regulatory measures to prevent corrupt officials from forex laundering, calling for a designated evaluation framework to track funds allocation to governments and utilisation.
He added that the government should also ensure thorough regulation for both the midstream and downstream segments of the oil industry to ensure compliance with national priorities and standards.
Managing Director, HighCap Securities, Mr. David Adonri, believes the use of naira for domestic transactions along the value chain of the petroleum industry is economically wise.
According to him, it is a misnomer for any local raw material to be bought by any user in Nigeria, in any currency other than the naira.
Adonri said: “Settlement of domestic trade with foreign currency puts pressure on foreign exchange and constrains access to domestic raw materials if the user cannot find foreign currency to buy at the right price.
“The entire process of first converting from domestic currency to foreign currency and subsequently converting to domestic currency for costing increases the cost of doing business.
“The user will also be unnecessarily exposed to foreign currency risk.
“Transacting domestic business with foreign currency is also a contravention of the rule of law which prohibits such a practice.”
