The Federal Government has instructed NNPC Limited (NNPCL) to sell crude oil to Dangote and other local refineries in naira.
Chairman of the Federal Inland Revenue Service (FIRS), Mr. Zacch Adedeji, announced this during a briefing with State House correspondents following the Federal Executive Council (FEC) meeting on Monday.
He stated that FEC approved the sale of petroleum products to authorized local petroleum marketing companies in naira at a fixed exchange rate.
The proposal also involves Afreximbank acting as a settlement bank to facilitate transactions by providing guarantees to NNPCL to cover the payment risk of local refineries and to Nigerian commercial banks for the payment risk of petroleum marketing companies.
“This approach will eliminate the need for international letters of credit, saving Nigeria substantial amounts of dollars,” he said.
Adedeji explained that the refinery sector is approaching steady-state operations and requires approximately 15 crude cargoes per month, translating to an annual supply cost of 13.5 billion dollars.
“NNPC Limited (NNPCL) has committed to supplying four crude oil cargoes monthly, leaving the remainder to be sourced from international traders. Currently, these transactions are conducted in dollars, significantly straining Nigeria’s foreign currency liquidity,” he said.
He emphasized the need for strategic intervention to leverage the Dangote Refinery to stabilize the naira and restore price stability.
“To manage the significant foreign exchange (FX) needs for local refineries and petroleum marketers, it is proposed that local refineries’ crude oil purchases from NNPCL be denominated in naira at a fixed exchange rate for a minimum period of six months,” Adedeji said.
According to him, the benefits of the proposal include reducing foreign exchange pressure, as the previous scenario utilized 660 million dollars per month, totaling 7.92 billion dollars annually.
“With the proposed scenario, expenditures are projected to decrease to 50 million dollars per month, equating to 600 million dollars annually. This reduction will significantly alleviate the pressure on foreign exchange reserves, leading to an annual savings of 7.32 billion dollars, representing 94 per cent,” he said.
Adedeji highlighted that reduced trade finance costs would result in annual savings of 79 million dollars in Letters of Credit costs through Afreximbank’s payment undertakings for bilateral trades.
“The benefits include stabilised petroleum product prices as the forward-selling of crude oil and refined products at a fixed exchange rate unaffected by exchange rate fluctuations will stabilise pump prices. Stabilising petroleum prices will likely drive the appreciation of the NGN, as petroleum imports account for 30 per cent of Nigeria’s FX demand. Stable petroleum prices will lower transportation costs, reducing food price inflation and positively impacting interest rates and dollar/naira exchange rates,” he said.
Adedeji also noted that this strategy aims to eliminate government intervention in the management of domestic petroleum prices, promoting market independence.
He said it would further facilitate competitiveness and allow greater market predictability and stability.
“This model, subject to the settlement bank’s (e.g., Afreximbank) credit approvals, can be replicated for other refineries, facilitating the trade of 445,000 barrels reserved for domestic consumption and achieving energy security. This further ensures that strategic reserves are pegged at tolerable prices driving improved economic stability,” Adedeji said. (NAN)
