(Bloomberg) -- Nigeria will settle crude sales to Africa’s newest and biggest oil refinery using the local currency’s rate in its foreign-exchange market, dousing concerns that it would fix below-market naira levels for the transactions.
The mega oil refinery owned by Nigerian billionaire Aliko Dangote will pay the local-currency equivalent of the prevailing international benchmark price of oil using the closing rate in the central bank’s Nafem window, a foreign-exchange trading portal for investors, exporters and end-users, three people familiar with the negotiations said.
This is part of an agreement that started on Oct. 1 to supply the 650,000 barrels-a-day refinery with crude, they said.
By doing this, the government has shunned a return to a past system of varying exchange rates, which partly pressured the naira and stoked inflation on imported goods.
Attempts to control the naira under the past administration gave rise to a multiple exchange-rate system, with large corporations, connected politicians and certain travelers getting dollars at different rates. That led to arbitrage and widened the gap between the official and street levels.
President Bola Tinubu criticized the practice when he took office in May 2023, and he ended it as part of reforms at the central bank that also saw Governor Olayemi Cardoso take control.
For years, Africa’s top crude producer shipped its oil abroad and imported finished petroleum with scarce foreign exchange. Local gasoline production, which began at the Dangote refinery in September, was considered crucial to ending Nigeria’s dependence on imported fuel and saving between 10% and 15% of dollar demand, according to Cardoso.
To ensure the refinery met the nation’s aspirations, a committee headed by Finance Minister Wale Edun reached a deal for the first-ever sale of crude in naira to the plant. This was to reduce pressure on the local currency and boost supply of gasoline to the domestic market.
Still, the agreement with the Dangote refinery raised concerns that the government was about to row back on its currency reforms after Dangote said that the Edun committee will come up with an “agreed” foreign-exchange rate for the transaction, and also fix the price at which he’d sell his gasoline.
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The central bank pushed back on conversations to fix a rate for the transaction, one of the people said, asking not to be identified to enable them speak freely on private negotiations. Spokespeople for the Dangote refinery and the Central Bank of Nigeria declined to comment.
The state-owned Nigeria National Petroleum Corp. has also signaled that it plans to end its role as the sole domestic buyer of the billionaire’s gasoline, paving the way for other retailers to negotiate with the Lagos plant as the government moves toward full deregulation of the market. That will likely see pump prices that rose 45% in September go up again.
The refusal to also fix gasoline prices from the refinery may result in an effective end to subsidy payments on the fuel that totaled about $10 billion in 2022.
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