Dangote Naira Sales Suspension: Potential Effects and Suggested Policy Response.

By Chinedu Okoye 



Dangote refinery has announced an ending petrol sales in Naira, effective September 28th, thiscould be detrimental to the Naira. As it saves the CBN $18 million daily, which is the dollar value of the average daily sales to the Nigerian market. That is ~$6 billion annually and ~$500 million monthly. This shaves of ~80% of current monthly Diaspora Remittances.


A Recipe for Disaster?

This could have implications on both Naira and price stability as explained below. However, wouldn't be an issue, if the refiner got all it's crude locally. But though it gets about half of its crude oil feed from local sources (NNPCL), it still imports the other half. 

The annualized average of the foreign portion of its total feed is reported to be I the range of 9-10 million barrels per month. That is roughly $6 - $7 billion annually.


Potential Effects and Proposed Policy Response 
So this could have an effect of reducing gross reserves by 15%, and net reserves by over 20%. Or mute any marginal increases in net FX flows. As all the monies (USD) collected (which would naturally stay in his bank, and by extension the banks reserve account at the CBN which makes up a portion of the total FX reserves) is cancelled out by the Refinery's crude import costs.

The Central Bank, NNPCL and the Refinery really need to think this through and find a possible solution that will be less disruptive. Cause just under a quarter hit to FX reserves will have negative effects on the Naira.

A possible solution would be to resume it's Naira for crude sales, matching the local portion of the crude feed, with the currency of revenues. This partially dedollarizes the refineries operation costs, as well as NNPCL oil revenues.

A ratio could be worked out where a full Naira for crude sales is not sustainable. In any case a compromise of some sort is required on both sides.

Broader Naira Concerns:
The main concern is why the company made the decision, and if it will consider a re-commencement. In either case this is not a matter that should be taken lightly. And Rueters cites fears of mismatch between revenues, and input costs.

This is especially worrying considering the fact that, as stated per our last outlook, the 12-month implied forward rates stood at N1,703/N1,783. And Crude oil receipts were a major driver of Naira value, along with remittances and FPI flows.


With Diaspora Remittances captured through official channels, is equal to the amount of crude imports, and the average dollar value of petrol sales to the oval market, the Refinery insisting on USD, takes the current outlook to the N1700/$ (±10%) worst case scenario in the outlook.


Conditions for the Reserve Effects:

On a net basis, reserves could be hit, but this is greatly dependent on;

- whether the local half (NNPCL supply) is settled in Naira or USD going forward as the NNPCL ha earlier announced a halt to the Naira for crude deal with local refiners.
- if the NNPCL can increase supply to partially mitigate the FX outflows.

Policy response will be crucial for how things turn out eventually, as a solution is in the interest of both parties. 

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