Nigeria Faces Forex Crisis Over DCA Policy

Think Tank Urges Cancellation to Safeguard Oil Revenue

by Oluwatosin Racheal Alabi

Nigeria’s foreign exchange and oil revenue crises are at risk of deepening in the coming months if immediate action isn’t taken to address the Domestic Crude Allocation (DCA) policy. This policy, which involves domestic sales of crude oil resulting in revenues in Naira instead of US dollars, is now under scrutiny for exacerbating the country’s forex challenges.

Agora Policy, a leading Nigerian think tank and non-profit, has published a report urging the immediate cancellation of the DCA policy. The report, titled ‘Cancelling Domestic Crude Oil Allocation is Nigeria’s Surest Path to Easing Forex Supply Crunch,’ argues that discontinuing DCA is essential for boosting forex inflow into Nigeria, offering a steady flow of foreign exchange, and thereby alleviating the cash flow challenge in the official segment of the forex markets.

In 2023, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) engaged with 52 crude oil exploration and production companies to ensure an adequate supply of crude oil to the country’s emerging refineries. However, Agora Policy’s findings suggest that the DCA policy has led to significant losses in oil revenue, with Nigeria losing 70% of its oil revenue to DCA between 2010 and 2022. The shift from joint ventures (JVs) to Production Sharing Contracts (PSCs) has meant that most of the federation’s share of produced crude oil is now allocated to DCA, rising dramatically from below 10% in the early 2000s to almost 100% by 2023.

The report highlights the detrimental impact of DCA on forex flows, noting that revenue from DCA sales is received in Naira, depriving the Central Bank of Nigeria (CBN) of the foreign exchange previously dominated by crude oil sales. From accounting for 94% of forex to the CBN in 2010, oil and gas flows dropped to 24% by June 2022, with the figure likely lower at present.

Agora Policy recommends that beyond improving security in the Niger Delta to curb oil theft and engaging with partners to increase investments in oil production, the Nigerian government should cancel the policy of earmarking its own share of oil output for domestic consumption. This move is seen as a short-term and sustainable fix for the oil revenue and forex flow challenges.

The report also criticizes the crude allocation system’s management, suggesting that it has become a significant issue recently. The system results in petrol being paid for in Naira, not dollars, with no guarantee that the Naira payment from DCA will translate to commensurate, or any, revenue to the federation account due to the national oil company’s habit of making upfront deductions from DCA revenue for various reasons.

Agora Policy’s analysis points to the urgent need for policy reform to ensure Nigeria’s oil and foreign exchange markets can recover and thrive, emphasizing the importance of transitioning away from practices that undermine the country’s economic stability.

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