5 Impacts of Dangote Refinery on the Exchange Rate

Dangote refinery, the world’s largest single-train refinery owned by Africa’s richest man, Aliko Dangote has brought forth a myriad of expectations and speculations regarding its potential impacts on the exchange.

With a capacity of 650,000 barrels per day, the refinery is expected to meet 100% of Nigeria’s demand for refined petroleum products and have a surplus for export. This is a huge achievement for Nigeria, as it will reduce its dependence on fuel imports and save foreign exchange. 

As Nigeria’s oil industry undergoes a significant transformation, the refinery’s operations are anticipated to influence the naira positively and even lead to a stronger naira. Here are possible ways the refinery will help the naira appreciate against the dollar.

Reduction in the importation of fuel

Nigeria has been heavily reliant on importing refined petroleum products to meet its domestic demand. This dependence on imports puts pressure on the country’s foreign exchange reserves and can lead to currency depreciation. However, with the operational capacity of Dangote’s Refinery, Nigeria can substantially decrease its need for fuel imports.

The refinery is set to produce enough petrol, fuel, and kerosene for domestic consumption which will reduce the need for Nigeria to import these products from abroad. Also, it will lower the demand for foreign currency, particularly the dollar and reduce the insistence on the naira exchange rate.

Nigeria spent about N10.1 trillion, or $23 billion, on the importation of PMS and other petroleum products in 2022 alone, so, by reducing or eliminating the need for fuel imports through the Dangote Refinery’s production,there would be a reduction in the demand for dollars in the importation of fuel. This reduction in the demand for foreign currency can help strengthen the naira against the dollar.

Exports more of  refined crude oil 

Traditionally, Nigeria has been an importer of refined petroleum products, which places a strain on its trade balance and depletes foreign exchange reserves. However, with the operational capacity of Dangote Refinery, Nigeria has the potential to shift from being a net importer to a significant exporter of refined petroleum products.

The exports of excess refined products  to other countries, especially in Africa, can bring about foreign exchange earnings for the country, increasing the supply of dollars in the foreign exchange market, increase its reservesIncreased dollar supply can help stabilize or strengthen the naira, boost the confidence of investors, and strengthen the naira’s value.

Leads to an improved trade balance

The country has faced challenges in maintaining a favorable trade balance due to its heavy reliance on importing refined petroleum products which places a strain on foreign exchange reserves and can lead to currency depreciation.The operational capacity of the refinery can significantly reduce its need for fuel imports, thus, leading to an improved trade balance.

Nigeria operated a trade surplus of $1 billion in 2022, which is not robust enough to encourage foreign investments that countries with positive trade balances or trade surpluses attract due to the level of export proceeds they can receive.

A positive trade balance means that the value of exports exceeds the value of imports, which could result in a surplus of foreign exchange, that is, boost foreign exchange reserves, contribute to overall currency stability, and contribute to strengthening the country’s currency by boosting its overall economic outlook. Additionally, the reduced fuel imports and increased petroleum product exports due to the refinery, can improve Nigeria’s trade balance.

Increases foreign exchange reserves

Foreign exchange reserves are a crucial indicator of a country’s ability to meet its external obligations and maintain currency stability. As the Refinery produces more fuel domestically, it would reduce Nigeria’s dependence on imported fuel, generate substantial foreign exchange earnings from exporting refined petroleum products, and conserve foreign exchange reserves.

Nigeria’s external reserves are around $35 billion, representing 6 months of imports only, so, the accumulation of higher reserves can strengthen Nigeria’s ability to support its currency and manage exchange rate fluctuations. Moreover,  It provides a cushion against external shocks and enhances confidence in the stability of the country’s currency.

Also, the increased foreign exchange reserves can attract foreign investors and boost investor confidence in Nigeria’s economy, leading to additional inflows of foreign capital and eventually further strengthen the country’s exchange rate and contribute to a more stable currency.

Job creation opportunities to stimulate  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. The construction phase itself had thousands of employment opportunities generated and the operation also will require a skilled workforce to operate and maintain its facilities. 

The increase in employment will lead to higher income levels and improved purchasing power among the workforce, which, in turn, stimulate economic growth, increase tax revenues, improve fiscal stability, and reduce inflation.