How the Nigerian Government can solve the Oil and Forex Crises – Updated

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By Ugo Nwagwu

The Nigerian National Petroleum Corporation (NNPC) has put the national daily consumption of petrol at 40 million liters per day. The ‘barrel of crude’ equivalent is 478,068. That is to say that 478,068 barrels of crude should be able to supply the demand of petrol every day in Nigeria. Nigeria’s peak production and the 2016 budget is based on 2.2m barrels of crude daily. Basically 22% of Nigeria’s peak capacity can take care of the Nation’s demand.

Even with the diminished supply due to militant pipeline attacks, Nigeria’s capacity is 1.6m and demand is 30% of that locally.

Currently, according to NNPC, Nigeria’s refineries have the capacity to take care of only 17% of the total demand. There are discussions to increase the capacity of Nigeria’s refineries through public means (NNPC) and through private investments most notably that of Nigeria’s wealthiest individual, Aliko Dangote. Dangote’s refinery is projected to refine 650,000 barrels per day and is currently scheduled to come online in 2018.

However due to the lack of available dollars in the system, rumors are that Dangote may be finding it difficult to get additional funding from foreign bans to be able to meet the deadline. Current projections from unnamed sources peg 2019 as more realistic

The Problem

In simple terms, the current problem is that, the lack of FOREX had caused NNPC to lift the cap on fuel prices from N86 to N145 earlier in the year. Many have called this subsidy removal but that is simply not the case. What has happened is that since the Central Bank has been making forex available to oil marketers at the official rate post naira-float.

Because of the volume of foreign currency required to service Nigeria’s energy needs, very little is left over to serve other industries such as manufacturing, airlines and individual needs to foreign and school fees.

When we initially published this article back on May 16, 2016, we predicted the following…

“The issue with that is twofold; a drastic increase in pump prices which among many effects will boost inflation and hurt the pocket books of the average Nigerian. You could make the argument that due to fuel scarcity, market forces have already caused pump prices to go up.

The second problem is that the pressure on forex rates will increase because now that markets will be sourcing for dollars through the parallel market, it would increase demand and force prices up. By my calculation, it will cost roughly $6b annually if all of Nigeria’s fuel supply were to be sourced externally.”

Since then, parallel market dollar rates have skyrocketed from N290 per dollar to as high as N500 per dollar at the end of September but has thankfully begun to drop trading at N450 per dollar at time of publishing.

Our solution is still the same as it was back in May. It is as follows….

The Solution

Nigeria has a long term solution in the works. If NNPC can boost capacity to 25% from 17% of demand and Dangote’s refinery comes online as scheduled with the ability to supply 130% of demand; and even with accounting for population growth, you can see that we could be heading towards a market driven solution in the long run.

However, we need a short term solution. Here’s my solution –

Crude Swaps for 100% of demand made entirely by NNPC. Stay with me. Crude swaps would eliminate the need for FOREX to source products. NNPC can then sell products for a minimal profit to marketers and allow markets to set their own prices. When those marketers compete with each other, it will regulate prices without subsidy and minimal price gouging.

What of the loss of revenue the FGN will sustain? Simple, with a foreign reserve of $26b, we would be budgeting $12b over a two year period. Moreover, the FG wouldn’t actually be losing money, they would just be converting USD to petroleum and then to Naira because they would be selling the petroleum swapped at a profit.

What of corruption such as that sustained in such deals during the past regimes? According to Nigeria Extractive Industries Transparency Initiative, Nigeria lost $966 million to crude oil swap deal between 2009 and 2012. So that’s a real concern and a real threat to this plan. However, this is a new regime which has promised to tackle corruption. Also, the loses aside, this actually worked quite well in the past. But back then, no one was paying attention to back room deals. We are not so oblivious now.

Conclusion

Such a move will leave the $20b estimated that Nigerians from the Diaspora to serve other forex demands. Others will come from Foreign Direct investments and whatever sources they currently come from since the FG has limited its supply.

I am sure much smarter people can offer even better solutions and some might even disagree.

What we can all agree to is that we need both short and long term solutions. What we can agree to is that we need to be having these sorts of discussions to come up with those solutions. What we also need is the political will to do something to ease the pressure on Nigeria citizens at the pump and in their pockets.

It appears that other long term plans may be in place to help Nigerians economically in the long run such as the Naira/Yuan swap agreement. But we have to provide short term solutions to allow Nigerians survive to the point they can also benefit from these long term plans.