Nigeria, the largest economy in Africa, has been actively pursuing strategies to bolster its reserves and halt the decline of its currency. The value of its currency has reached unprecedented lows on the black market just two months after trading restrictions were eased on the official market.
In a recent meeting with President Bola Tinubu to explore avenues for increasing dollar liquidity in the official market, the acting central bank governor, Folashodun Shonubi, announced on Monday that the central bank is poised to implement measures that will make a significant impact on currency markets in the upcoming days. Shonubi emphasized that President Tinubu is concerned about the black-market exchange rate becoming a reference point for domestic transactions, which in turn influences inflation. However, specific details regarding the exact steps to be taken were not provided.
President Tinubu has introduced some of the most ambitious reforms in decades, including the removal of a costly fuel subsidy and the devaluation of the national currency, the naira. These reforms have attracted attention from foreign investors, as Nigeria seeks to address challenges such as high inflation and escalating debt-servicing expenses.
To stabilize the naira amidst its plummet against the dollar, the Nigerian National Petroleum Company Limited (NNPCL) has secured a $3 billion emergency crude repayment loan. This move follows concerns of an anticipated surge in petroleum product prices across the nation due to the weakening naira. In response to appeals from oil marketers, the government is taking urgent actions to safeguard the value of the currency.
Interestingly, within just 24 hours of dispelling speculations about a potential increase in the pump price of Premium Motor Spirit (PMS), the NNPCL revealed that it has entered into an agreement with the African Export-Import Bank (AFREXIM bank) for the $3 billion loan, signaling a proactive stance in managing the economic situation.
In a statement released on its verified X platform, formerly known as Twitter, the company announced on Wednesday that it has finalized a commitment letter and Term Sheet with AFREXIM Bank for the immediate disbursement of a $3 billion emergency crude repayment loan. The succinct statement read, “NNPC Ltd Secures $3 Billion Emergency Crude Repayment Loan from AFREXIM Bank, Bringing Relief to the Naira.”
The NNPC Ltd. and AFREXIM Bank have jointly executed the commitment letter and Termsheet for the emergency $3 billion crude oil repayment loan. This signing ceremony took place at the bank’s headquarters in Cairo, Egypt, with the aim of facilitating an expedient disbursement that will enable NNPC Ltd. to actively support the Federal Government’s ongoing fiscal and monetary policy reforms, which are aimed at stabilizing the exchange rate market.
In response to this development, industry experts have characterized the loan as a mechanism where the repayment is fulfilled with crude oil. However, questions have arisen about why NNPC Ltd., a fully commercialized entity, is securing a substantial $3 billion loan on behalf of the government.
Offering further insights via his verified X channel, Ajuri Ngelale, the official Spokesperson and Special Adviser to the President on media, elaborated that the new influx of foreign exchange is intended to assist NNPCL in prepaying taxes and royalties and, concurrently, furnish the Federal Government with dollar liquidity to stabilize the Naira. This will be accomplished through incremental releases in accordance with the government’s specific requirements.
Ngelale emphasized that a stronger Naira will result in a decrease in fuel prices, offering a significant buffer against the need to reinstate a subsidy regime. Supporting Ngelale’s stance, O’tega Ogra, the Senior Special Assistant to the President on Digital/New Media, clarified that the loan does not involve a crude-for-refined products exchange but rather an upfront cash loan secured against a portion of future crude oil production.
Ogra underscored that this arrangement is not tantamount to a crude for refined products agreement where the government does not derive any proceeds from the swap. The loan will be repaid using a fraction of the earnings from future crude oil production. This strategic approach ensures a harmonious balance between the current economic demands and the nation’s future production capacity.
The disbursal of funds will occur in a phased manner based on the specific requisites of the Federal Government. Ogra added that while the deregulation policy remains in place, a bolstered Naira resulting from this initiative will lead to a reduction in fuel costs. Consequently, an appreciation in the value of the Naira will correspond to a reduction in fuel expenses, mitigating further price increases.
Commenting on this development, Mr. Paul Alaje, a Senior Economist at SPM Partners, asserted that the loan will yield positive effects on the nation’s foreign reserves. Alaje explained the multi-faceted impact, stating, “This move serves three key purposes: firstly, it contributes to enhancing the Central Bank’s foreign reserves. Secondly, it provides NNPC Ltd. with a predictable amount in dollars, enabling more stability in terms of purchasing PMS for domestic distribution. Lastly, this initiative has significant implications for the broader stability of the Naira.”
Nevertheless, Alaje cautioned that proper procedures should be followed, advocating that such funds should be managed through the Debt Management Office (DMO) to ensure transparency and responsible financial governance. He emphasized the need for clear payment terms and prudent fiscal management of the loan.