‘Nigeria lost 70% of forex in 12 years to oil domestic allocation’

Nigeria lost 70 per cent of its oil revenue to Domestic Crude Allocation (DCA) between 2010 and 2022, a policy memo by Agora Policy has revealed.

This month’s report, tagged ‘Cancelling domestic crude oil allocation is Nigeria’s surest path to easing forex supply crunch’, noted that as of 2010, flows from oil and gas accounted for 94 per cent of forex to the Central Bank of Nigeria (CBN), but dipped to 24 per cent by June 2022.

This comes as President Bola Tinubu directed that all revenue from crude oil sales must go to the apex bank as against the Nigerian National Petroleum Company Limited (NNPCL) that currently performs the function.

An unconfirmed report said under the new arrangement, NNPCL will submit receipts for crude oil to CBN for vetting and documentation.

The move, experts said, resonates with the new direction of the current government to toe a different path.   

Specifically, on forex flows, the report maintained that the practice is injurious to survival of the country, especially at this time.

“It is a key challenge because the revenue from DCA sales is received in Naira, meaning that the Central Bank of Nigeria (CBN) is starved of a steady and healthy flow of foreign exchange from what used to be its dominant source: crude oil sales. As of 2010, flows from oil and gas accounted for 94 per cent of forex to the CBN, but plummeted to 24 per cent by June 2022, and is conceivably much lower now…”, the document pointed out.

The report stated that while it is not a guarantee that the Naira payment from DCA would translate to any revenue to the Federation Account because the “NNPCL is in the habit of making upfront deductions for sundry reasons from revenue accruing from the DCA,” the move by the President to ensure all oil funds are domiciled in the CBN may likely be the magic wand in this regard.

The document alleged that it is believed that the DCA is the site where NNPCL performs its dark magic.

It queried why the DCA serves as a ‘mouthpiece’ for the NNPCL whenever it failed to remit oil revenue to the Federation Account, stating: “Crucially, the DCA policy not only provides an insight into why the national oil company failed to make remittances to the Federation Account for a long spell, but also explains why forex inflows from sales of federation’s crude oil dwindled and the country’s external reserves stagnated at a period of historically high oil prices.”

The report also noted that the exchange rate may not abate soon, adding: “The supply of foreign exchange in the country has not been sufficient to meet demand. The country has a backlog of foreign exchange obligations estimated at between $4 billion and $7 billion by the new CBN Governor during his Senate’s screening. The backlog has been so because there was not enough foreign currency in the country to meet demand.”

Though oil theft has been blamed for the slide in forex inflow, the report disagreed.

Its words: “We posit in this paper that the reduced forex flows reflect the increased allocation of federation’s crude to DCA at the expense of direct federation’s oil exports, which normally translated to dollar flows.”

To curb the bleeding, the report urged the Federal Government to discontinue the DCA.

“We submit that the DCA has outlived its usefulness, and its continued use has proved costly to the country, especially for foreign exchange inflows, thereby hurting the Naira. We recommend ending the DCA and selling the federation’s crude oil for exports, or if sold domestically to private refineries, it should be in dollars. If this is done, steady inflows of foreign exchange will boost the supply of foreign exchange, provide some quick wins to address foreign exchange scarcity, and help to maintain some level of stability for the Naira,” it submitted.