The refinery being built by Aliko Dangote is the single factor most likely to prevent the naira from falling ever lower, Bhatia says in London. Dangote said in April that he expects refinery commissioning before the end of Muhammadu Buhari’s term as president in 2023.
Once the refinery is fully ramped up, it should make a big difference to the currency, Bhatia says. Nigeria will be able to reduce the number of dollars needed to pay for the import of refined products and has the potential to become a net exporter of such products in West Africa. “It’s definitely a positive step.”
Still, the refinery “on its own won’t change the dynamics of the foreign exchange market,” Bhatia says. “The other answer is ramping up crude export volumes.”
Bhatia points to the fact that Nigeria fell well short of its OPEC production quota in 2021. Security and production problems continue to constrain output this year, he says. Despite higher prices, “they’re not actually winning in terms of crude exports.”
Nigeria’s gains from high oil prices are being undermined by the fact that the country’s petrol subsidy becomes more expensive as the oil climbs, and by theft and under-investment which has caused a drop in production, according to Renaissance Capital analysts Yvonne Mhango and Nikolas Stefanou.
- The country’s production of crude and condensates, according to their research, has been in long-term decline, dropping from 2.5m barrels of oil per day (mbopd) in 2010 to 1.6m in 2021.
- Average production this year is likely to be in the 1.5-1.7 mbopd range, constrained by theft and low levels of infrastructure uptime, Renaissance says.
- Increased prices for crude mean that “the dynamics are now in their favour,” Bhatia says. “High oil prices open the way for significant investment” in production capacity.
- While the oil sector globally is becoming faster in technological terms, there are still long lead times for new production, he says. Still, the passage of Nigeria’s Petroleum Industry Bill in 2021 “should give clarity on the fiscal regime.”
How low can it go?
The unofficial naira rate this month weakened to more than 600 to the dollar, its lowest level this year. Some have pointed to Nigerian politicians needing to get their hands on dollars before next year’s elections as a reason for the decline.
The pressures on the naira come from many directions, including the lack of security in northern food-producing areas, Bhatia says. That means more food imports paid for in foreign currency are needed. The high cost of diesel is also hurting the naira, he adds.
There will “undoubtedly” be further depreciation in the naira, says Ibrahim Shelleng, managing director at Credent Investment Managers in Abuja. That will be prompted by factors such as demand for the dollar by politicians and more expensive imports caused by the Russian-Ukraine war, he says. A further devaluation of the official rate is also possible.
- The central bank, Shelleng says, is “likely to resist any calls for further devaluation especially leading up to the 2023 elections but may be forced to consider it amidst crippling dollar shortages.”
- The gap between the official rate around 416 and unofficial rates around 600 is “significant” but “not huge by frontier-market standards,” Bhatia says. Still, he adds, it’s probable that there will be a further devaluation.
A lot of things will have to go right for Nigeria just to keep the naira around its current level.
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