The Federal Government of Nigeria has listed some of the benefits of selling Crude oil to Dangote refinery and other local refineries in naira rather than in foreign currency, notably the greenback.
The Executive Chairman of the Federal Internal Revenue Service (FIRS), Zacch Adedeji, highlighted these benefits while speaking at the last Federal Executive Council (FEC) at the State House in Abuja.
Recall that Nairametrics reported that President Tinubu through FEC approved the sales of crude oil by the National Oil Company, NNPC, to the Dangote refinery in local currency, offering the 650,000 barrel per day petrochemical plant a much-needed lifeline.
Speaking at the FEC meeting, Adedeji noted the following benefits of such a transaction to the Dangote refinery:
5. Reduction in FX pressure: Adedeji said the pressure in foreign exchange will be drastically reduced if sales of crude oil to Dangote are dominated by local currency.
According to the FIRS boss, Nigeria spends about 30% to 40% of its FX on the importation of petrol, putting much demand on the country’s foreign reserve. He said this transaction would be a game changer for the FX market, with the country able to save hard-earned greenback instead of spending it on importation.
“What does this mean to our economy? The pressure on foreign exchange rates today will be reduced. We spend roughly 30 to 40% of our FX on the importation of PMS that we consume. That will be drastically reduced,” Adedeji said.
4. Nigeria to save $7.32 billion yearly: In addition to the reduction in FX pressure, Adedeji noted that Nigeria will save annually the total sum of $7.32 billion if all transactions of crude to local refineries are done in local currency as approved by FEC.
He explained that Nigeria currently spends $600 million on importation of petrol per month. On a yearly basis, PMS importation gulps about $9.72 billion.
However, selling Crude oil and buying refined products from Dangote Refinery at local currency will save the country a total sum of $7.32 billion annually, a 94% decline from the actual spending.
“With the new approval, this will reduce to a maximum of $50 million per month. When annualized, that is only $600 million which is a total reduction of 94%. In monetary terms, that is savings of about $7.32 billion,” Adedeji added.
3. Pump Price Stability of PMS: The FIRS boss also dispelled concerns around the pump price instability of PMS resulting from FX fluctuation.
According to him, the new approval also addresses the issue of pump price stability of PMS as all transactions will be dominated in the local currency. He said Dangote refinery will no longer have to worry about the fluctuation of the naira against the dollar in the FX market.
By extension, he said, the price of petroleum products will be stable as the arrangements are all done in naira with no influence from external factors like FX illiquidity.
2. Elimination of International Credit of Letters: The federal government also said that the deal will result in the elimination of the International Credit of Letters (ICL) from international creditors as transactions will be domiciled within Nigeria.
ICL refers to a financial document used in international trade to ensure that payment will be received.
This document, often known as a “Letter of Credit” (LC), is issued by a bank or a financial institution guaranteeing that a seller will receive a buyer’s payment on time and for the correct amount.
International letter of credit usually requires airtight documentation as well as settlement processes that may take months to actualize.
However, Adedeji said the council approved Afreximbank Bank to be the lead settlement bank between NNPC and Dangote refinery in ensuring a seamless transaction process, thus eliminating the challenge of tedious transactions.
1 . NNPC to supply 4 of the 15 cargoes of crude to Dangote yearly: Lastly, the deal means the national oil company will supply 4 out of the 15 cargoes of crude oil the mega refinery needs annually for its operation.
According to the federal government, Dangote currently requires 15 cargoes of crude at a cost of $13.5 billion, most of which will be imported from places like the United States, Brazil and Libya in dollars.
However, the new approval by the federal government stipulates that the national oil company will supply 4 of these cargoes which is about 450,000 barrels meant for domestic consumption in naira, thus reducing the expenses for both Dangote refinery as well as the FX market.