Nigeria, Africa’s largest economy and top oil producer, is facing significant challenges as it grapples with a mounting debt of $3 billion owed to trading houses and oil majors for fuel supplies.
According to Reuters, the country’s debt accumulation to companies such as Vitol and BP has resulted in delayed repayments, with Nigeria falling four to six months behind schedule. Reuters claims four traders and executives spoke to them about this.
Mele Kyari, the head of NNPC, recently announced the discontinuation of the swap arrangement, known as Direct Purchase Direct Sale (DSDP), following years of criticism from civil society groups regarding transparency and corruption.
Kyari stated that payments would now be made in cash instead of swapping for crude oil. However, traders report that NNPC is still engaging in gasoline imports through swaps for July delivery, requiring payment in both crude oil and pending payments for previous months of swaps.
Fallouts of Subsidy Removal
Shortly after assuming office, President Tinubu took bold steps by removing petrol price caps and lifting restrictions on the Nigerian currency, the naira. These long-awaited liberalization changes were welcomed by investors.
- As part of the reform efforts, Nigeria plans to scrap an old scheme that involved swapping its crude oil for gasoline imports. Under this arrangement, Nigeria sold gasoline purchased at market prices to its citizens at a discount, with the government covering the price difference.
- However, the subsidy costs reached approximately $10 billion last year, straining the economy. Previous attempts to end the scheme had sparked protests in the past.
- Nonetheless, Nigeria’s limited refinery capacity necessitates fuel imports to meet domestic demand.
Who is being owed
The involved trading consortia, including Vitol, Mercuria, BP, and TotalEnergies, declined to comment on the matter, as did NNPC and the Nigerian government.
- Traders familiar with the situation estimate that back payments will continue until at least October 2023. NNPC claims that the government owes it $6 billion for subsidized fuel sales.
- Nigeria’s fiscal challenges have been exacerbated by declining oil production, which reduces the revenue available for debt repayment. The country’s daily crude oil output has decreased from 1.8 million barrels to as little as 1.1 million barrels due to a lack of investment.
- The payment of fuel deliveries with crude oil cargoes results in reduced crude exports and diminished revenue for Nigeria and NNPC. Previously, NNPC’s contribution to state coffers exceeded $30 billion annually in 2011 but reached zero in 2022 as the revenues were utilized to offset gasoline sale losses.
This debt burden poses a hurdle to President Bola Tinubu’s reform agenda, which has removed the costly fuel subsidies, wants to address growing debt and alleviate foreign exchange shortages in the country.
Optics
Fuel – Experts in international monetary matters have long recommended Nigeria remove fuel subsidies and liberalize its foreign exchange policies to address the fiscal crisis. This has now been done.
In recent years, the central bank maintained an artificially high exchange rate for the naira, limiting access to a select few, including NNPC. This prevented potential private gasoline importers from participating in the market.
In addition to private importers, Nigeria’s fuel demand in the future is expected to be met by businessman Aliko Dangote’s refinery. However, the full-scale operations of Nigeria’s first major
Forex – President Tinubu’s recent moves to devalue the naira and eliminate preferential rates have aimed to address this issue, allowing all potential importers to access foreign exchange at the same cost and compete in the fuel importation sector.
However, the volatility of the naira and concerns about difficulties in repatriating funds due to ongoing dollar shortages have deterred private firms from engaging in fuel imports for the time being.
NAIRAMETRIC
