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By Kunle Akinwole
No country lives in isolation. There must be international trade and exchange of goods between countries of the world. And payment for this trade is usually denominated in the United States dollars. However, Nigeria has been in an unfavourable position in respect to meeting its forex obligations. And many individuals and businesses are pressured. The exact position is that Nigeria is in dire need of US dollars. Never has there been a time when the country would be facing tough times because it cannot meet its dollar demands.
Remember that through the past six decades, Nigeria slowly became an heavily import-dependent country. From our petroleum products, to clothes and shoes to building materials, vehicles, machineries and even food, we imported a sizable quantity. Over the years, this behaviour has put more pressure on the US dollar with more Naira chasing fewer dollars to offset our needs, wants and tastes. While financial engineering did not allow many Nigerians realise how much the Naira was haemorrhaging, the figures could not be ‘faked’ till eternity.
Remember how the foreign airlines more or less deserted the country, leaving travellers with steep airfares because they were owed. There is also the case of rationing dollars for manufacturers who in the course of production find it difficult to import raw materials and equipment. This scenario has been a cause of concern for the federal government with the Central Bank of Nigeria (CBN) intervening with varying policies recently. But the focus of this piece is the move initiated by the NNPC Limited last August where it secured on behalf of the country a crude repayment loan with international funders.
The project which is coded Gazelle involves a $3.3bn loan by the Afrexim Bank aimed at addressing the forex shortage in the country. It is a crude oil prepayment loan which would see NNPC sell 90, 000 barrels of crude oil daily to Afexim Bank from 2024 to 2029. In business circuits, this arrangement is called a forward sale. According to the terms, the country will repay an interest of 11.85% per annum on the loan. But also check this. The repayment is valued in oil. This is a novel form of the classic trade by barter. And for Project Gazelle, the price of allocated crude is projected at $65 per barrel. Call it a breather and you’ll be correct. It’s a win-win.
With our huge reserves of crude oil and dearth of dollars, the swap would enable the country to use what it has in abundance – oil- to get what it needs – dollars. And anyone looking at the arrangement and rubbishing at how Nigeria may be robbed with a lower rate for crude which averages at $70, they should realise that any gain over or loss below that price would accrue to the country. The implication of this is that, should oil price rise, Nigeria repays the loan faster. Should oil prices fall, it will take the country longer to finish repaying the loan.
On why the NNPC Limited embarked on initiating this Special Purpose Vehicle (SPV), Chief Corporate Communication Officer of NNPCL, Femi Soneye, elaborated in an interview he granted recently.
“NNPC Ltd entered into this arrangement to ultimately provide dollar financing to the Federal Government,” Soneye said.
“It is a short to mid-term solution to the foreign exchange shortage challenge currently being faced by the country. Nigeria needs to urgently improve its foreign exchange position. As of June 2023, the Central Bank had over US$6 billion of unmet obligations – forward contracts with third party institutions which were past their expiry dates. These unmet obligations have pressured the nation’s external reserves and resulted in a significant devaluation of the Naira. The pre-financing arrangement allows the Federal Government to receive foreign exchange, in advance, to enable it resolve its unmet FX obligations. These inflows of foreign exchange will ensure exchange rate stability and is an immediate quick-win available to the country.”
He continues: “With Nigeria having over 35 billion barrels of proven reserves that need to be exploited and produced, a fraction of these prospective reserves can be used to raise the required funding. With a forward sale financing, the country can securitize these proven oil reserves today. This improves foreign currency inflows immediately rather than having to wait for years. Also, by supporting more exports and bringing in overseas financing, forward-sale financing can significantly boost the availability of foreign currency for an oil/gas dependent country. This improves the country’s ability to pay for imports and manage its overall economy. When exports finally start, the forward-sale investments are repaid using the money earned from those same exports. This improves the country’s balance of payments. The financing gives the government more stable and predictable oil earnings. This helps in planning budgets and managing foreign exchange reserves.”
At this time, the Gazelle Project is a welcome development. According to the deal Afrexim Bank will disburse $2.25bn immediately. This sum would no doubt begin to ameliorate the existing forex imbalance Nigeria is experiencing. For instance, by the beginning of 2024, the CBN confirmed that foreign airlines were paid about $62m in January when bank debts were settled by the CBN to the tune of $2bn. It should be recalled that the forward commitments of the CBN totals about $7bn.
Speaking on the payments to the foreign airlines in January, CBN Acting Director of Corporate Communications, Hakama Sidi Alia, said: “These payments signify the CBN’s ongoing efforts to settle all remaining valid forward transactions, to alleviate the current pressure on the country’s exchange rate. It is anticipated that this initiative by the CBN should provide a considerable boost to the Naira hug against other major world currencies and further increase investor confidence in the Nigeria economy.”
However, the International Air Transport Association (IATA) said that foreign airlines were still being owed over $700m. The yoyo has become a muddle that needs clearing one way or the other, else, the common Nigerians would continue suffering. It is to ameliorate such forex imbalances in the system that the Gazelle project is welcome.
But it is more important that factors that spurred this situation should not arise again. Some recent policy directives from the Central Bank of Nigeria have shown that the Nigerian banking system is greedy. Flushed with easy money, many bankers merely perfected the wicked act of hoarding and speculating on dollars, thereby starving relevant sectors of the economy of needed foreign exchange. A report by Punch newspaper after a CBN directive asking banks to sell excess dollars put an increase in dollar supply at 180% after banks sold excess dollars to the tune of $440m. According to the new policy from the CBN, banks must be able to account for and tie whatever dollar they are holding to a project. In the past, such was not the case. Some insiders in the banking sector said the banks could be idly sitting atop as much $5bn. This trend of soulless round tripping of dollars must be frowned against.
Overall, this Gazelle deal is a win-win for Nigeria. It promises just like the characteristic trait of the animal, a fast relief, an almost immediate re-balancing of the forex mix to Nigeria’s favour. Creative ideas like this are what our economists should focus on rather than engage in voodoo economics. This is the sort of idea capable of re-energising the economy and improving the country’s trade terms. Kudos NNPC Limited.
