• Wednesday, February 21, 2024
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BusinessDay

How naira value can be strengthened — Economists

Money in circulation records marginal first decline in 11 months

To strengthen the value of naira, there is a need for increased crude oil production in the country, analysts have said.

The currency of Africa’s largest economy has consistently been under pressure following low inflows from oil sales, remittances and foreign capital.

Speaking to BusinessDay, Johnson Chukwu, founder, Cowry Asset Management Limited, said although the Dangote Refinery was expected to reduce the pressure on the foreign exchange, this would only be felt if the country ramped up its crude production.

According to him, “If the refineries – Dangote, Port Harcourt – come on stream, they will reduce our export of crude and unless we have an increase in crude production, any allocation to local refineries will reduce the amount we made from crude sales.”

Chukwu said, “In the first place, bear in mind that the country’s foreign exchange earnings are from crude and importation of fuel account for 30 percent of our total import, so, if the refineries come on stream, it will reduce our export of crude and unless we have an increase in crude production, any allocation to the local refinery will reduce the amount we made from crude sales.

“So, we have to increase crude production because whatever is going to local refineries will be from the increment and not from the existing 1.3m or 1.4m barrel we produce daily. If we don’t do that, it simply means what we save from fuel import would be lost to export earnings from crude.”

“However, whatever crude is allocated to Dangote and Port Harcourt should be from incremental crude production so that we can maintain our current export earnings and reduce the 30 percent spent on import.”

Another analyst, Kingsley Chinda, said the 650,000 barrel-per-day Dangote refinery is expected to meet 100 percent of Nigeria’s demand for refined petroleum products and generate foreign exchange earnings for Nigeria by exporting 40 percent of its products.

According to Chinda, producing enough petrol, diesel, jet fuel, and kerosene for domestic consumption, the refinery will reduce the need for Nigeria to import products from abroad. This will lower the demand for dollars and ease the pressure on the naira exchange rate.

“Nigeria’s significant expenditure on fuel imports puts pressure on the demand for foreign currency, particularly the dollar. Reducing or eliminating the need for fuel imports through the Dangote Refinery’s production would reduce the demand for dollars in the importation of fuel. This decreased demand for foreign currency can help strengthen the naira against the dollar.”

“The establishment of the Dangote Refinery will not only contribute to reducing imported inflation and associated costs but also has the potential to attract foreign investments, further bolstering exchange rate stability.”

“The presence of a significant refinery indicates Nigeria’s commitment to developing its domestic refining capacity, which can instill confidence in international investors. The refinery’s scale and strategic importance in the oil and gas sector can make Nigeria an attractive investment destination.

“The increased foreign direct investment brings in foreign currency inflows, which can strengthen the country’s foreign exchange reserves and positively impact the exchange rate. Foreign investments not only provide financial stability but also bring expertise, technology, and best practices, further enhancing the refinery’s operations and the overall economy.”

“This combination of reduced imported inflation and the attraction of foreign investments position the Dangote Refinery as a catalyst for exchange rate stability and economic growth in Nigeria.”