The stalled negotiations between the Nigerian National Petroleum Company Limited (NNPCL) and Dangote Refinery regarding the naira-for-crude swap deal have raised concerns among market observers, who warn of potential negative consequences for Nigeria’s foreign exchange market and inflation trajectory. This agreement, implemented in October 2024, allowed local refineries to purchase crude oil using naira instead of dollars, aiming to bolster domestic refining capacity, reduce reliance on imported petroleum products, and stabilize the naira by alleviating pressure on foreign exchange reserves. The deal’s expiration on Monday, without a renewed agreement, signifies a return to dollar-denominated crude oil purchases for Nigerian refineries, including the newly operational Dangote Refinery, potentially disrupting the recent positive trends in inflation and exchange rate stability.
Nigeria had witnessed a second consecutive month of declining inflation in February 2025, reaching 23.18%, down from 24.48% in January, following a rebasing of the Consumer Price Index (CPI) by the National Bureau of Statistics (NBS). This positive momentum, attributed partly to the naira-for-crude arrangement, is now threatened by the deal’s suspension. Experts fear a resurgence of inflationary pressures, driven by the increased demand for dollars to purchase crude oil on the international market, impacting energy costs, a significant component of Nigeria’s inflation basket. The potential disruption to fuel supply, if Dangote Refinery suspends local supply due to the unresolved naira-for-crude issue, further exacerbates the risk of escalating prices.
Analysts at Afrinvest, while projecting a further moderation in headline inflation to 21.4% year-on-year in March, acknowledge the downside risks posed by the uncertain future of the naira-for-crude deal. They highlight the potential for a supply imbalance and renewed price pressures if the agreement is not reinstated promptly. The ability of the Central Bank of Nigeria (CBN) to maintain adequate foreign exchange liquidity across market segments is also a critical factor influencing the inflation outlook. The anticipated increase in dollar demand from local refineries could strain the CBN’s ability to manage exchange rate stability.
The suspension of the naira-for-crude agreement adds another layer of complexity to Nigeria’s economic challenges. The CEO of the Nigerian Economic Summit Group (NESG), Dr. Tayo Aduloju, emphasized the added pressure on the foreign exchange market as local refiners scramble for dollars to secure crude oil supplies. This increased demand for dollars could potentially reverse the recent gains in naira appreciation observed following the introduction of the CBN’s Investors’ and Exporters’ Foreign Exchange (I&E) window.
Dr. Ayodeji Ebo, Managing Director/Chief Business Officer of Optimus by Afrinvest, further elaborates on the potential impact, underscoring the significance of fuel importation in Nigeria’s FX demand. He points out that fuel importation accounts for a substantial portion, estimated at 30-40%, of the total FX demand. The suspension of the naira-for-crude arrangement necessitates a return to dollar-denominated purchases, placing renewed pressure on the FX market and potentially jeopardizing the recent stability achieved through interventions like the I&E window. The ripple effects of this increased demand for dollars extend beyond the fuel sector, impacting the broader economy due to Nigeria’s import dependency.
Experts who spoke to The PUNCH newspaper echoed these concerns, emphasizing the contribution of the naira-for-crude initiative to the recent stability of the naira. Dr. Muda Yusuf, Director of the Centre for the Promotion of Private Enterprise (CPPE), highlights the potential pressure on the foreign exchange market if refineries are forced to import crude oil and source dollars for payment, potentially leading to currency depreciation. Despite a marginal appreciation of the naira against the dollar on Friday, the long-term outlook remains uncertain, particularly if the naira-for-crude deal is not revived. The current situation necessitates a swift resolution to mitigate the potential negative consequences for Nigeria’s economy, particularly in terms of inflation and exchange rate stability.
