Naira-for-crude suspension threat to declining inflation, FX liquidity – Experts
CHIGOZIE AMADI
Market watchers have said that the stalled talks over the naira-for-crude deal between the NNPCL and Dangote refineries could threaten liquidity in the foreign exchange market and affect the deceleration of inflation.
Talks on the naira-for-crude contract, which is scheduled to end on Monday, have been dragging on for weeks.
The arrangement, introduced on October 1, 2024, allowed local refiners to purchase crude oil in naira instead of dollars. The initiative was designed to support domestic refining capacity, reduce reliance on imported petroleum products, and stabilise the local currency by easing pressure on foreign exchange reserves.
The termination of the agreement means that Nigerian refineries, including the much-anticipated Dangote facility, will now have to source crude oil from international suppliers, paying in dollars instead of naira.
According to the National Bureau of Statistics, in February 2025, the headline inflation rate eased to 23.18 per cent relative to the January 2025 headline inflation rate of 24.48 per cent. This is the second consecutive decline following the rebasing of the Consumer Price Index by the NBS in January.
While experts have hailed the deceleration of inflation, there are fears that the discontinuation of the naira-for-crude contract would reverse the trend, given the contributory effect of energy costs on inflation in Nigeria.
In their outlook report for inflation in March, analysts at Afrinvest said that while further moderation is expected, the suspension of the naira-for-crude deal could reverse the gains of the past couple of months in terms of inflation.
“For March, we prognose a further moderation in headline inflation to 21.4 per cent year-on-year (1.5 per cent m/m). Our outlook is shaped by expectations of sustained relative stability in the exchange rate and energy goods prices (notably, PMS). However, downside risks to our outlook include uncertainty on CBN’s capacity to sustain adequate FX liquidity across market segments. Beyond March, a potential supply imbalance that the planned suspension of PMS supply locally by the Dangote refinery, due to delay in the renegotiation of a new crude oil purchase in the naira agreement with NNPC Limited, could cause the economy a resurgence in price pressure if not nipped in the bud,” part of the report read.
The Chief Executive Officer of the Nigerian Economic Summit Group, Dr Tayo Aduloju, at the recently held media stakeholders’ forum, reiterated that the suspension of the deal would add pressure to the FX market as the local refiners would seek dollars to buy crude.
Furthermore, the Managing Director/Chief Business Officer of Optimus by Afrinvest, Dr Ayodeji Ebo, said, “With the suspense around the renewal of the deal, what would happen is that the demand for FX, depending on the data you are looking at, which is an average of 30 to 40 per cent of the FX demand, is for fuel importation. In the past few months, we saw that impact on the FX levels; there was appreciation, building on the EFEMs portal that was introduced by the Central Bank.
“What we will see is that the dealers will need to demand FX, and we already saw the pressure on the market from the potential demand, so there is a need for us to look at the implications holistically. Nigeria is an import-dependent economy; whatever happens, it puts pressure on the FX, and that affects every other thing apart from fuel. Yes, there can be an argument for the view that the FX that NNPCL should have been giving to CBN is now naira, but if Dangote and other local refineries don’t have this on the table, they will still need to demand FX from the CBN, so you see the chain? We are hoping that this is resolved as soon as possible.”
Other experts who spoke to The PUNCH earlier in March stated that the naira-for-crude initiative had contributed to the stability of the naira in recent times but expressed concerns about the long-term outlook.
The Director of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said, “If the refineries do not have access to the domestic crude, which they pay for in naira, that means that they have to import crude oil, and if they import the crude, they have to source for the dollar. This puts pressure on the foreign exchange market, and that may trigger or contribute to the depreciation of the currency.”
On Friday, the naira appreciated by 0.12 per cent to 1,536.82/$ at the official window.
