How Will NNPCL’s $3bn Loan Affect Naira?

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Many have expected that the NNPCL loan would bring some calm to the foreign exchange market and help the Naira to pare back some gains, ultimately reducing the landing cost of refined petroleum products, But NIYI JACOBS in this report, after speaking to different analysts writes, that the actions may have some merit, but the specifics of the term sheet remain hazy and the government’s response to issues raised around the loan are blurry or inaccurate

Nigeria’s Federal Government (FGN) appeared to have gone uncomfortably quiet after the initial excitement generated by its early pro-market pronouncements, which suggested the liberalization of the foreign exchange market and the removal of fuel subsidies.
In what seems to be a slip into lower policy gears, analysts observed that the outcome of the bemused look of the government at a growing parallel and official market rate spread turned the ignition of a speculative selling binge as currency traders went on a ‘shorting’ or selling binge as they tasted blood in the currency waters.
Local analysts argue that FGN should have followed the announcements that saw the S&P upgrade the country’s credit outlook from negative to stable with steps to attract capital inflows.
The last few weeks’ events are a refresher course for the authorities in international economics. In the post-liberalization period, the Government held its cards too close to its vest, failing to give the markets and investors reasons to retain their optimism.
While the decision to borrow against future crude oil export earnings to prevent the naira from taking a thorough beating was necessary, such an approach in the future would neither be sufficient nor advisable.
Heineken Lokpobiri, the new Minister of State for Petroleum Resources and Mohammed Badaru, the newly appointed Minister of Defense, must take the increase in crude production as their first and primary assignments to meet the OPEC quota of 1.8mbpd.
On the other hand, Dele Alake, Minister for Solid Minerals, must begin to think pragmatically about improving the country’s non-oil exports.
In the battle for survival, the niceties of conventional rules of engagement (ROE) may be imprudent. The government must be prepared to pull off both gloves and fight for the rebound of the Nigerian economy with guile, guts, and grim determination. Both Nigeria’s today and tomorrow depend on it. Following the observed large currency sell-offs, the government commenced telegraphing its imminent policy action in the FX market.
The Acting CBN Governor Folashodun Shonubi, at the weekend, had stated that the situation in the market was being monitored and that the government was working on a short-term fix.
Therefore, the Afrexim dollar loan to the Nigeria National Petroleum Company Limited (NNPCL) did not come as a surprise.

Detail of the US$3bn Crude Oil Repayment Facility

The loan is a US$3bn crude oil repayment facility. Although the loan term sheet was not made public, according to a statement from NNPCL, the loan is meant to enable the NNPC Limited to support the Federal Government of Nigeria (FGN) in its ‘ongoing fiscal and monetary policy reforms aimed at stabilizing the exchange rate market’.
According to the statement, the funds, which will be released in tranches based on the specific needs and requirements of the FGN, would take the form of advance payment of royalties and taxes by NNPCL. Reactions to the loan have been mixed and split analysts down the middle.
According to an analyst who requested anonymity, ‘the actions may have some merit, but the specifics of the term sheet remain hazy and the government’s response to issues raised around the loan are blurry or inaccurate.’
He pointed to some issues explained by Otega Ogra, a special adviser to the President on digital media. He disagreed with points 2, 5, 6, and 7.

How Much FX Demand Does The US$3bn Loan Help To Meet?

The perceived FX shortage in the country has made demand for FX more speculative, amounting to roughly 40% or 50% of total demand, fuelling the sharp depreciation of the Naira. The rat race of speculators seems to be ending soon following the announcement of the US$3bn bailout loan from Afrexim bank.
The US$3bn will boost liquidity in the short term and cover the vast FX backlog, especially US$812.2m owed to foreign airlines. Analysts are curious about how many months the US$3bn dollar can cover, considering that the total volume of dollars traded in H1 2023 amounted to US$13.11bn, according to FMDQ.
However, it covers both dollar demand and supply. Positively, the expected considerable reduction in speculative demand should lengthen the FX availability at the official market.
However, the 41 FX ban item can still induce demand in the parallel market in the long run. The Naira has appreciated N860/US$1 in the parallel market as of 3 pm on August 17, 2023, from N945/US$1 on August 15, 2023, suggesting a further reduction in the parallel & official rate gap

How Much Would This Help The FG In Its Plans To ‘Hold’ The Price Of PMS?

While it is expected that the NNPCL loan would bring some calm to the foreign exchange market and help the Naira to pare back some gains, ultimately reducing the landing cost of refined petroleum products, particularly PMS, which was earlier projected to hit N700/litre, the fact that the pump price of PMS largely depends on the movements of international crude oil prices and other associated costs like vessel insurance and landing costs suggests that the action may not be the silver bullet some think it to be.
When the subsidy was removed in May, Brent traded at $72/b. Today it sells for $82/b due to the voluntary cuts in production by Saudi Arabia and Russia. Yet, analysts forecast even higher crude oil prices.
If global oil prices continue upward, the naira appreciation may not reduce imported fuel costs or translate to retail fuel prices. Analysts also believe that the current NNPC pump price of N617/litre does not reflect a truly liberalized market.