NNPCL $3 billion crude repayment loan unlocks short term relief but ignores other factors – Experts
In a strategic move aimed at stabilizing the Naira and mitigating fuel pump price escalation to N720 from N615/N617 per litre without resorting to the contentious fuel subsidy framework, the Nigerian National Petroleum Company Limited (NNPCL) announced a landmark achievement on Wednesday, August 16.
The company secured a substantial $3 billion crude repayment loan from the African Export-Import Bank (Afreximbank), igniting discussions about the economic implications and long-term sustainability of this decision.
Reining in Fuel Prices Amidst Global Trends
The nexus between international crude prices and local fuel pump rates is a well-established phenomenon. Recent times have witnessed a surge in Brent crude prices, crossing the $80 per barrel mark for the first time since May 2023.
As of Thursday, August 17, Brent crude was $84.23 per barrel at noon (GMT+1). This trend prompted concerns over escalating fuel prices, leading countries like Brazil and Ghana to adjust their pump rates accordingly.
In this context, the decision of the Nigerian government to recalibrate fuel pump prices becomes a logical response to global market dynamics.
Recall that Nairametrics previously reported that the Argus benchmark price trading platform reported prices of $960.86/MT and $1,010.86, including premium operational costs.
By applying the standard volume conversion rate of 1,341 litres per metric ton, the benchmark dollar cost ranges between $0.7538 to $0.7649 cents per litre, revealing a projected landing cost per litre, ranging between N655.06 and N669.29.
Notably, this report also highlighted the contribution of industry players in transporting petroleum products, incurring distribution costs ranging from N3 to N45 within different parts of the country.
Thus, pump prices could vary from N658.06 to N700.06 in Lagos, and even higher in other regions, considering differing landing costs.
NNPCL’s Strategic Intervention
Given Nigeria’s soaring inflation rate (currently standing at 24.08% as of the end of July, compared to the 22.79% in June 2023), escalating costs of essential commodities, and eroding purchasing power, the NNPCL’s intervention was deemed necessary.
Diverging from Kenya’s approach of reinstating fuel subsidies, NNPCL pursued the AfreximBank crude repayment loan as a countermeasure.
This significant move garnered attention due to its innovative nature.
The agreement, as clarified by NNPCL, doesn’t entail a crude-for-refined product swap but rather a cash loan against future crude oil production proceeds.
The rationale behind the arrangement is to prepay taxes and royalties, which would have otherwise been advanced to the treasury.
Experts, including Dr. Sam Amadi during an interview via Arise News, commended this approach as a safer alternative to seeking funds from the International Monetary Fund (IMF).
According to him, the loan agreement is another form of subsidy. However, this agreement will be executed more efficiently. He said:
“The NNPCL will be subsidizing in a much more efficient manner. They want to use this agreement as a stopgap to ensure that prices do not keep rising. The reality of the matter is that because we are an import-dependent country, this loan will help the government shore up the dollar.
“When they said they are going to defend the naira, they did not mean going back to a fixed exchange rate regime, they want to use a lot of open market operations to support the naira against the dollar and so, this borrowing essentially will help to balance back the supply and demand of dollar.
“More dollars will help the naira to gain and when the naira gains, it has some impact on the premium motor spirit price (petrol) because even if there is no change in the landing cost, as long as forex changes, then the price will change in terms of how much Nigerians pay in naira.
In an exclusive conversation with Nairametrics, Kelvin Emmanuel, CEO of Dairy Hills, expressed concern about Nigeria’s fluctuating daily output of 1.45 to 1.5 million barrels, coupled with ongoing Joint Venture (JV) cash payments.
The $3 billion crude swap loan from AfreximBank, he cautioned, might lead to future oil remittance deductions, with a single-digit interest charge.
He urged reducing the black-market premium to ensure stable PMS prices. Emmanuel stressed transparency, seeking details about the loan’s interest, strike price, and provisions for price fluctuations.
He highlighted the need for comprehensive information on repayment tenure and noted CBN’s $6.8 billion outstanding debt.
Managing debts to external asset managers JP Morgan and Goldman Sachs also emerged as a pressing concern, crucial for Nigeria’s payment reserves.
He said:
“Also how does the Federal Government intend to raise oil and gas, non-oil and gas exports to improve the balance of payment reserves, as a means to align with the ratio of reserves to external debt level, that is topical for stabilizing FX rates and incentivizing institutional inflows”?
Economic Realities of Crude Repayment Loan
The intricacies of Nigeria’s $3 billion crude repayment loan carry profound implications.
The influx of borrowed dollars into the economy, juxtaposed with reduced crude oil revenues due to payment in kind, raises pertinent concerns.
Nigeria’s current crude oil output falls short of the 1.69 million barrels/day benchmark set in the 2023 budget.
Filling this gap necessitates addressing multifaceted challenges: theft, flooding, spills, and insufficient investments. Effectively repaying the loan, consisting of $3 billion worth of crude plus interest, hinges on resolving these issues.
The projected dollar influx from the AfreximBank deal, though substantial, stems from non-productive origins.
This artificial nature raises questions about its long-term impact on the economy, especially considering Nigeria’s limited productivity capacity.
This scenario underscores the urgency for Nigeria to pivot towards productivity over consumption.
The consensus, echoed by Dr. Amadi in his Arise News interview, underscores the imperative of nurturing a productive export market to bolster forex earnings, thereby fortifying the economy for sustained growth.
Full Story: https://nairametrics.com/2023/08/18/nnpcl-3-billion-crude-repayment-loan/
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