TheCable

Agora Policy, an Abuja-based think tank, has urged the federal government to cancel the policy of budgeting for domestic crude allocation (DCA) to boost foreign exchange (FX) inflow and stabilise the naira.

The organisation said this in its latest policy memo titled ‘Cancelling Domestic Crude Oil Allocation is Nigeria’s Surest Path to Easing Forex Supply Crunch’.

DCA refers to a system where a certain portion of a country’s oil production is reserved by the government for use within the country itself.

Agora Policy said the implementation of this short-term fix will yield immediate results, such as providing a steady (not one-off) flow of FX and addressing the cash flow challenges in the official segment of the forex markets.

The firm said the cancellation of the DCA is the most realistic way to reduce pressure and maintain some level of stability for the naira.

Agora Policy also said the removal of DCA will end the dodgy deductions and accounting associated with the 

“DCA policy has been aptly described as an active crime scene,” the think-tank said.

According to the firm, with the removal of the petrol subsidy and the implementation of the Petroleum Industry Act (PIA), there are no more reasons for continuing with the DCA.

“The DCA has acquired an outsized profile of recent. Any serious attempt at understanding and reforming how Nigeria’s share of oil is accounted and paid for must, for a number of reasons, zero in on the management of and the recent prominence of the DCA,” Agora Policy said.

“With the drastic reduction in oil production in Nigeria and the shift in production arrangements away from Joint Ventures (JVs) to Production Sharing Contracts (PSCs), most of the Federation’s share of crude oil produced in Nigeria is channelled to DCA, which has dramatically risen from below 10% of Federation’s share of oil in the early 2000s to almost 100% by 2023.

“This is not just a suboptimal allocation issue. In relation to forex flows, 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 steady and healthy flow of foreign exchange from what used to be its dominant source: crude oil sales.

“As at 2010, flows from oil and gas accounted for 94% of forex to the CBN but plummeted to 24% by June 2022, and is conceivably much lower now (CBN, like NNPCL, has stopped disclosing some critical data).

“Crude oil exports still account for over 70% of Nigeria’s total exports but since 2016 an increasingly disproportionate percentage of the country’s share of crude oil exports is earmarked for domestic consumption. 

“The earmarked barrels of crude oil return first as petrol, then, in terms of monetary flow, as Naira, not dollars. 

“This is because the resultant petrol from DCA is paid for in Naira, not dollars. It is worth highlighting that there is no guarantee that the Naira payment from DCA would translate to commensurate, or even any, revenue to the federation account. 

“This is because the national oil company has always been in the habit of making upfront deductions for sundry reasons from revenue accruing from the DCA. 

“The DCA is the site where NNPC performs its dark magic.” 

WHY NNPCL FAILED TO MAKE REMITTANCE  TO FEDERATION ACCOUNT 

The organisation further said the DCA policy is one of the reasons why the Nigerian National Petroleum Company Limited (NNPCL)  failed to make remittances to the federation account.

According to Agora Policy, the DCA is the reason forex inflows from sales of the federation’s crude oil dwindled and the country’s external reserves stagnated at a period of historically high oil prices.

“While the country needs to pursue all these options as both stop-gap and long-term measures, it should urgently embrace the one option that is largely under its control and can ensure a steady and sustainable flow of foreign exchange: earning dollars from the sale of its crude oil wherever it is sold,” the firm said. 

“For this to be possible, the DCA policy needs to go immediately.”

Aside from recommending cancellation, Agora Policy also advised selling the federation’s crude oil for exports — but if sold domestically to private refineries, the firm said sales should be in dollars.