In a strategic move to combat the severe foreign exchange crisis that has had a crippling effect on Nigeria’s economy, the government is set to secure a staggering $10 billion. This financial infusion aims to counter the devaluation of the Naira, which has impacted both official and parallel markets, exacerbating the cost of living for households and businesses in Africa’s most populous nation.
BusinessDay’s investigation reveals that this $10 billion lifeline will be obtained from two key sources. The Nigerian National Petroleum Company Limited (NNPC) is expected to contribute a substantial $7 billion through forward sales, while Qatar will provide the remaining balance in the form of a soft credit without stringent conditions.
Kelvin Emmanuel, CEO of Dairy Hills Limited, describes Goldman Sachs’ involvement through NNPC as a form of securities lending. This arrangement leverages Goldman Sachs’ role as an external asset manager for the Central Bank of Nigeria (CBN). It allows NNPC to access $10 billion to address its outstanding financial obligations.
Emmanuel suggests that this move can help stabilize the exchange rate, potentially bringing it back to the N800 range in the short term. The loan from Goldman Sachs is expected to be repaid using gas revenues from entities like WAGPCo and NLNG over an extended period.
However, it’s worth noting that this approach could result in a negative reading of the country’s external reserves, and the unsecured nature of the facility might attract an annual interest rate of 8 percent. As a result, the central bank may use gas sales in a forward transaction as collateral, given its responsibility for managing the oil and gas receipts account for NNPC offshore.
Security lending is a financial tool utilized by central banks globally to inject liquidity into markets and enhance their returns. While it can be beneficial, responsible usage is crucial to avoid issues like inflation.
Nigeria’s foreign exchange shortage is a consequence of foreign investors exiting local assets during a period of low oil prices. They have yet to return, and the Central Bank of Nigeria (CBN) has unresolved demands for dollars from foreign investors and airlines. As a result, some entities have turned to the black market, where the Naira has plummeted to record lows, creating a significant disparity with the official exchange rate.
Wale Edun, the finance minister, remains optimistic about an influx of $10 billion in foreign exchange in the near future, thanks to recent measures, including domestic issuance of instruments in foreign currency and the integration of cash outside the banking system into the banking sector. Additionally, liquidity is expected to increase through NNPC crude sales and foreign investment firms eager to invest in Nigeria.
Despite the challenges, the government remains committed to stabilizing the currency and bolstering foreign exchange liquidity by enhancing market transparency and allowing domestic entities to issue foreign exchange instruments. This multifaceted strategy is designed to facilitate the flow of foreign exchange in the Nigerian economy.
