President Bola Ahmed Tinubu has approved a directive for the Nigerian National Petroleum Corporation (NNPC) to sell crude oil to Dangote Refinery and other upcoming refineries in Naira. This move aims to stabilize fuel prices and the Naira-Dollar exchange rate, potentially saving billions of dollars annually.

This is actually a good policy if implemented well: “…NNPC to sell crude to [local refineries] in Naira. To ensure the stability of the pump price of refined fuel and the dollar-Naira exchange rate, the Federal Executive Council today adopted a proposal by President Tinubu to sell crude to Dangote Refinery and other upcoming refineries in Naira. Dangote Refinery at the moment requires 15 cargoes of crude, at a cost of $13.5 billion yearly. NNPC has committed to supply four. 

“But the FEC has approved that the 450,000 barrels meant for domestic consumption be offered in Naira to Nigerian refineries, using the Dangote refinery as pilot. The exchange rate will be fixed for the duration of this transaction. Afreximbank and other settlement banks in Nigeria will facilitate the trade between Dangote and NNPC Limited. The game changing intervention will eliminate the need for international letters of credit. It will also save the country of billions of dollars used in importing refined fuel.” – Bayo Onanuga, Special Adviser Information and Strategy to Nigerian President.

This is a good policy because Nigeria has agreed that something must be subsidized. This is a clever way to bring back fuel subsidies without any political risk. Simply, if the international oil companies are to sell crude oil at $80 pb and Nigeria is paying in Naira (say N1,200/$)  for the local refineries, any deviation on the FX will be covered by Nigeria.

With that, Nigeria has subsidized the price of fuel at the pumps since if Dangote Refinery gets the crude oil at this discounted price (the firm is paying in Naira, expected to be at a favourable rate), the government will likely mandate that it cannot sell as though it has paid in US dollars. Simply, Nigeria has subsidized fuel, but not at the pumps, but at the crude oil chain since local refineries will get the feedstock at below international rate.

I support this policy because Nigeria must subsidize something. It is an illusion to think market forces can work in everything. Recall in July last year when I noted that Nigeria cannot float its currency and remove fuel subsidy at the same time. Specifically, on July 28, 2023, I wrote that “Nigeria will either pause the full floating of its currency or return back to fuel subsidy” because using basic economics, Nigeria cannot handle both at the same time due to the heterogeneous nature of the economy, across regions. Today, it has subsidized the upstream of fuel and that is a brilliant policy.

Plus, it has disintermediated the use of US dollars since crude will be paid in Naira, refined locally in Naira, and bought at the pumps in Naira. Nice playbook there.

Ethiopia follows the Nigerian path: “Ethiopia’s national currency dropped 30 per cent against the dollar after its central Bank floated its birr currency on Monday. This move is aimed at securing International Monetary Fund (IMF) support and advanced debt restructuring support.” When I heard that on BBC World Service this morning, I shouted “currency hit again”.

China gives the loans but the IMF comes to the rescue and then introduces measures to ensure it is repaid. Both China and the IMF are doing what they have to do, the real issue is the African leadership. China did not force anyone to take loan, and the IMF is not imposing itself on any nation.

Remember: debt dey pass debt; always better to borrow from home. Unfortunately, Africa does not have the institutions which can fund these loans, and that is the real debt!

Why? In an Igbo novel, Uwadiegwu, the author dropped a great hint: when you borrow, go to your kinsman so that if the debt goes bad, he may lock you up, but at the same time he would be expected to take care of your family since he is your kinsman! That is how debts work: pains are lesser when the debt is home. America borrows dollars and they’re responsible for printing dollars. No other country enjoys that combo.

A very great explanation on why the Nigerian government is imposing the 70% windfall tax on FX-related bank profits. Zacch Adedeji, the chairman of the tax agency, Federal Inland Revenue Service (FIRS), noted that the Nigerian manufacturing sector lost N1.7 trillion in 2023 as a result of changes in FX policies, and most of those companies collapsed.

But as that happened, another part of the economy – specifically banking – benefited from the FX policy changes. So, to balance the indices, the government has decided to retroactively tax the banks on the FX-related windfalls. It posited that this will help attract global investors:

 “If that is not done, that is when the real investor will run away from Nigeria because this is a way to balance the economy indices and this is what shows that we actually know what we are doing, and we have a plan for where we are going. As a responsible government that we are, this is what we should do. I don’t think there is anything that will make investors lose confidence in what we are doing.” 

From his statement, it is very clear that Nigeria did not model the implications of the FX policy on manufacturing, banking and the broad economy. Had that been done, possibly, this excess bank taxes would have even been introduced when the policy was announced. More so, they would have been prepared  for the policy fallout within the manufacturing sector.

Lesson: We must learn from this, and do modeling before any major policy implementation.