Dangote Refinery, the world’s largest single-train refinery, was commissioned by President Buhari on May 22nd, 2023, in Lagos.
The refinery, which has a capacity of 650,000 barrels per day, is expected to meet 100% of Nigeria’s demand for refined petroleum products and have a surplus for export.
The refinery is also expected to create thousands of jobs, boost fuel supplies across Africa, and generate foreign exchange earnings for Nigeria by exporting 40% of its products.
It is part of a $20 billion complex that includes a fertilizer plant and a power station. The refinery is seen as a game-changer for Nigeria’s economy and the downstream petroleum products market in the entire African region.
This is a huge achievement for Nigeria, as it will reduce its dependence on fuel imports and save foreign exchange. On the day of the commissioning of the plant, the exchange rate was trading at about N750/$1 on the black market.
It is expected that if things go as planned, the refinery might have a positive impact on naira stability and could even lead to a stronger naira.
But how will the refinery help the naira appreciate against the dollar? Here are some possible ways:
Reduction in fuel imports
By producing enough petrol, diesel, jet fuel, and kerosene for domestic consumption, the refinery will reduce the need for Nigeria to import these products from abroad. This will lower the demand for dollars and ease the pressure on the naira exchange rate.
In 2022 alone, Nigeria spent about N10.1 trillion, or $23 billion, on the importation of PMS and other petroleum products.
Nigeria’s significant expenditure on fuel imports puts pressure on the demand for foreign currency, particularly the dollar.
By reducing or eliminating the need for fuel imports through the Dangote Refinery’s production, it 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.
Exporting refined crude oil
The operation of a large refinery like Dangote can potentially lead to increased production and exports of refined petroleum products. This can generate foreign exchange earnings for the country, thereby increasing the supply of dollars in the foreign exchange market.
By exporting excess refined products to other countries, especially in Africa, the refinery will earn foreign exchange for Nigeria and increase its reserves. Increased dollar supply can help stabilize or strengthen the naira, boost the confidence of investors, and strengthen the naira’s value.
Increased foreign exchange reserves
As the Dangote Refinery produces more fuel domestically, it would reduce Nigeria’s dependence on imported fuel and conserve foreign exchange reserves.
Higher foreign exchange reserves provide stability and confidence in the currency, which can positively impact the exchange rate. Nigeria’s external reserves are around $35 billion, representing 6 months of imports only.
The opportunity cost of subsidizing petroleum products, which includes loss of export revenue, will be gained thus boosting external reserves.
Reduce inflation-linked currency depreciation
The operation of the Dangote Refinery can contribute to exchange rate stability by reducing imported inflation and its associated costs for Nigeria. Currently, Nigeria relies on imported refined petroleum products, which can contribute to inflationary pressures due to the higher costs involved in international trade.
However, with the refinery’s production capacity, the country would become more self-sufficient in meeting domestic fuel demand, reducing the need for expensive imports.
This decreased dependence on imports can help mitigate the impact of imported inflation, as the prices of locally produced petroleum products would be less influenced by global market dynamics.
Additionally, by eliminating the costs associated with importation, such as shipping, customs duties, and other related expenses, the overall cost of fuel consumption for Nigerians could potentially decrease.
This reduction in costs can positively impact consumers, improve purchasing power, and contribute to a more stable exchange rate.
Attract foreign investments
The establishment of the Dangote Refinery not only contributes 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 instil confidence in international investors. The refinery’s scale and strategic importance in the oil and gas sector can make Nigeria an attractive investment destination.
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 positions the Dangote Refinery as a catalyst for exchange rate stability and economic growth in Nigeria.
Improve trade balance
Countries with positive trade balances or trade surpluses attract foreign investment due to the level of export proceeds they can receive. While Nigeria operated a trade surplus of $1 billion in 2022, it is not robust enough to encourage foreign investments.
But with reduced fuel imports and potentially increased petroleum product exports due to the Dangote Refinery, Nigeria’s trade balance may improve. A positive trade balance means that the value of exports exceeds the value of imports.
This can contribute to strengthening the country’s currency by boosting its overall economic outlook.
Job creation could boost the economy
The operation of the Dangote Refinery and the creation of thousands of direct and indirect jobs can have significant positive impacts on the economy, including stimulating economic growth, increasing tax revenues, improving fiscal stability, and reducing inflation.
These factors contribute to a more favourable environment for exchange rate stability.
By generating employment opportunities, boosting consumer spending, and attracting foreign investment, the refinery supports economic growth and confidence in the economy, which are key factors for maintaining a stable exchange rate.
These are some of the ways that Dangote Refinery could help the naira appreciate against the dollar. Of course, there are also challenges and risks involved, such as securing enough crude supply, maintaining operational efficiency, complying with environmental standards, and dealing with market fluctuations.
But with proper management and support from the government and stakeholders, the Dangote Refinery could be a game-changer for Nigeria’s economy and currency.
Source: Nairametrics
