The Nigerian Naira has extended its gaining streak against the US Dollar as the parallel segment of the foreign exchange (FX) market reacts to the $3 billion crude oil repayment loan secured by the Nigerian National Petroleum Company Limited (NNPCL) from the Africa Import and Export Bank (AFREXIM).
This move is aimed at stabilising the local currency.
As of 9:52 AM on Thursday, August 17, the parallel market FX dealers were observed buying the US Dollar at N835 while selling it at N860.
This marks a significant improvement from the rates prior to the announcement of the AFREXIM loan deal, where dealers were buying the US Dollar at N880 and selling it at N910.
Otega Ogra, the senior special assistant to President Bola Tinubu on Digital and New Media, explained in a tweet what the $3 billion Emergency Crude Repayment Loan from Afrexim is meant to achieve.
“What’s the benefit of this loan to Nigeria? The loan will assist NNPC Limited in settling taxes and royalties in advance.
It will also equip the Federal Government with the necessary dollar liquidity to stabilise the naira with limited risk,” he said.
“Will this affect fuel prices? A strengthened Naira as a result of this initiative will lead to a reduction in fuel costs.
This means that if the Naira appreciates in value, the cost of fuel will drop, and further increases will be halted,” Ogra added.
“What about subsidies? Are they coming back? No. A stronger Naira will result in lower prices than at the current level, making subsidies unnecessary.
The deregulation policy remains unchanged,” the President’s aide said.
In their recent commentary, the Damilare Ojo-led team of research analysts at Lagos-based Meristem said, “In our view, core inflation will remain elevated in the near term in light of the continued free-fall of the Naira.
The outlook of the FX market is largely marked by uncertainty and volatility; as such, there is an urgent need for a unified strategy to address these challenges, involving enhancing FX liquidity, promoting export diversity, and fostering investors’ confidence through transparent policies.”
The National Bureau of Statistics (NBS) reported the headline inflation rate for July 2023 to have increased by 129 basis points (bps) to 24.08 per cent year-on-year (YoY) from 22.79 per cent YoY in June 2023.
The Meristem analysts noted that the July data also reflects the effect of the petroleum subsidy removal in May and the resultant increase in prices for human and merchandise transportation in the subsequent months.
Before receiving firepower from Afrexim Bank in Cairo to help fight speculators that have ambushed the FX market, the gap between the official and the parallel markets had widened by about N200 in the past week.
It had reached N950/$ on the parallel market before this recent drop.
Tunde Delu, an economist, explained that the loan is an attempt to bridge the FX supply gap.
“It is apparent that the short-term panacea or solution to the rising foreign exchange prices is to seek alternative supply avenues.
One of the options open to the federal government is to seek such foreign loans directly or through its appointed agencies.
The implication would be a positive effect on the supply of FX, thereby pushing the price of FX down as the demand-supply gap shrinks,” Delu said.
“To simplify it in a nutshell, we need ‘quick cash’ to cover the demand for forex by all sectors, and that has been sourced via the $3 billion crude oil repayment loan, which enables NNPCL to meet its payment obligations,” he added.
Omotayo Akorede Samuel, a corporate finance lawyer, said that the $3 billion emergency crude repayment loan from Afrexim is standard practice.
“This is standard practice in the Oil and Gas industry. Crude oil repayment financing has several benefits for oil companies.”
He said one of the primary benefits is that it allows companies to repay their debts without having to use their cash reserves.
“This can be particularly beneficial for companies that are experiencing financial difficulties or FX issues, like Nigeria. Rather than go to the CBN for FX, this $3 billion will be used!
“Another benefit of crude oil repayment financing is that the repayment is tied to Crude Oil.
This means that the company can use its cash reserves for other purposes, such as investing in new projects. ‘Crude oil no dey finish! You can pay your loan off in six months if you want,” Samuel said.
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