For years, the Dangote Refinery has been hailed as a potential lifeline for Nigeria’s ailing economy. Despite its vast oil reserves, Nigeria has failed to achieve sustained economic growth and stability due to deep-rooted structural dysfunctions. A critical aspect of this failure is the country’s inability to develop a robust oil refining industry capable of meeting domestic demand for one of its most crucial energy sources — petrol.
The ramifications of this dysfunction are far-reaching, profoundly impacting the country’s fiscal health, monetary system, and consequently, the entire economy. As a major oil producer, Nigeria should benefit from substantial government revenues and foreign exchange inflows generated by its oil wealth. These inflows should, in theory, ensure currency stability, a favourable balance of payments, and steady exchange rates.
However, the lack of adequate refining capacity among other factors like declining oil production, oil theft and inadequate economic diversification (of revenue and foreign exchange sources) constitute major impediments to achieving economic stability. This is the basis for heightened optimism for the Dangote Refinery project and the economic stabilisation potential it holds. And it also explains the frustration of Nigerians towards the dramatic summersaults that characterised the refinery’s pre-takeoff.
The Nigerian National Petroleum Company Limited (NNPCL) has begun lifting Premium Motor Spirit (PMS) from the Dangote Refinery, though this milestone is overshadowed by renewed controversy surrounding product pricing. While the Technical Sub-Committee on Naira-based crude sales to local refineries, established by the president, is expected to resolve these pricing issues, Nigerians continue to express disappointment over the lack of a substantial decrease in petrol pump prices—which had been their greatest expectation.
It is crucial to recognize that this expectation of lower petrol prices may not be realised in the short term. The slight reduction anticipated from eliminating shipping and logistics costs related to fuel importation may not directly lead to a drop in pump prices. This is largely because the government is unlikely to reinstate a subsidy regime, and Dangote, as a private business, must account for various costs, including refining expenses, overheads, borrowing costs, insurance, and profitability.
The price of petrol at the pump will primarily depend on global crude oil prices and the exchange rate. Any significant reduction in pump prices will occur either from a decline in global oil prices or from the appreciation of the Naira against the dollar in the foreign exchange market. For this reason, a decrease in petrol prices is likely to happen only in the mid-to-long term, rather than immediately.
Read also: What to expect from Nigerian economy in next six months
The Tinubu-led government’s strategic move to sell crude oil to Dangote Refinery in Naira is expected to reduce the demand for the dollar by 40 percent, shifting the demand curve downwards and resulting in a stronger Naira against the dollar. This would make crude oil cheaper in local currency terms, ultimately driving down the cost of petrol at the pump.
Alhaji Aliko Dangote’s vision for a $20 billion investment in the downstream oil industry, despite a failed previous attempt and complex obstacles, is a rare display of entrepreneurial resilience. Despite four state-owned refineries that have spent over N11 trillion in failed turnaround maintenance costs within 10 years, Dangote’s courage and perseverance demonstrate his resilience.
Nigeria’s largest industrial achievement, this massive business venture, offers significant benefits such as job creation, uninterrupted supply, energy security, and a downstream sector that ensures proper petrol consumption accounting. It also has the potential for exchange rate stabilisation and foreign exchange inflows from exporting refinery products.
Nevertheless, the responsibility now falls on the government to implement the necessary interventions to turn these potentials into reality. Without such action, the opportunity for economic gains may deteriorate. And Nigerians, while coming to terms with the fact that the refinery might not reduce pump prices in the short term still remain optimistic that in the mid-to-long term, the multiplier effect resulting from the 40 percent decrease in dollar demand will translate into a stronger Naira and exert downward pressure on pump price and ultimately cost-push and imported inflation across the board.
The reduction in dollar demand without an increase in dollar supply within the economy could potentially negate the expected exchange rate improvement. Without government intervention in the upstream oil sector, the 40 percent decrease in dollar demand for petroleum imports could be offset by a decline in dollar inflows from oil exports.
Read also: Fuel subsidy, exchange rate reforms to boost Nigerian economy – IMF
In the meantime, the Central Bank of Nigeria (CBN) continues its contractionary monetary policy, raising the Monetary Policy Rate (MPR) by 50 basis points to 27.25 percent. This move aims to curb inflation, which has slowed from 34.19% in June to 32.2 percent in August, while also pre-empting the renewed inflationary pressures anticipated from rising food costs due to flooding and insecurity, increasing energy prices (especially petrol), and exchange rate instability. The CBN insists on monetary tightening even amidst debates regarding the true causation of our inflation actually is.
Experts question the effectiveness of raising the MPR due to the lack of significant impact on inflation. They argue that inflationary pressures are caused by a combination of factors, including fiscal measures that perpetuate economic overheating, increased government spending, and supply-side dynamics due to cost-push causations, such as increased energy and agricultural input prices and exchange rate pressures.
Therefore, it is argued that continuous monetary tightening primarily affects the demand side, but only to a limited extent, as it only impacts consumer and private investment spending rather than addressing the more significant inflationary pressure from unchecked government spending. While raising the MPR may have initially attracted foreign portfolio investment inflows, which briefly helped in stabilising the exchange rate, the currency’s volatility has persisted as these inflows have slowed. Investors seem to be awaiting evidence of a clear fiscal direction that supports liquidity in the foreign exchange market before committing further.
On the supply side, tightening seems to be ultimately exacerbating inflationary pressures rather than alleviating them by increasing the cost of borrowing especially for larger businesses. This results either in reduced production (and resultant cost reduction, retrenchment of workers) for those who are unable to borrow at such unfavourable rates or an increase in the cost of production and subsequent increase in prices of output for those who can borrow. In both cases, these higher costs are passed on to consumers through price increases, further fueling inflation through the supply chain.
The inflation and exchange rate challenges in Nigeria require a nuanced approach, not just orthodox monetary tightening measures. Strengthening the real economy and reevaluating national fiscal management is crucial for fostering an environment conducive to investment, innovation, production, and export capacity. Nigeria’s fiscal side appears inactive, leaving a gap in addressing these structural issues.
Therefore, as Dangote Refinery begins operations and the expectations of Nigerians continue to heighten, the government must imbibe fiscal discipline by reducing the cost of governance and redirecting financial resources away from non-essential expenditures towards investment in growth-driving and export-enhancing areas like infrastructure development; manufacturing and industrialization; crude oil production and security (of oil pipelines against oil theft and major agricultural production corridors).
These measures can boost productivity, enhance capital inflows, and increase foreign exchange liquidity from oil and other exports. Additionally, they would generate the required capital and revenue needed for investments towards a more robust economic diversification initiative. This approach would support diversification in both revenue and exports, leading to greater price and exchange rate stability, enhanced fiscal performance and ultimately contributing to overall economic growth and development.
Abdulhaleem Ishaq Ringim is an economic and public policy enthusiast. He writes from Zaria and can be reached via [email protected]
Join BusinessDay whatsapp Channel, to stay up to date
Open In Whatsapp
