By Emmanuel Oluwadola
Foreign Exchange is one of the major factors that shape the market trends in every country, which is determined by the number of buyers and sellers including the exchange rate of currencies. In Nigeria, the USD($)/ Naira(₦) currency pair is the most traded in the FX market.
Problems set in when a country’s foreign exchange earnings come from only one sector. About 90% of foreign exchange earnings in Nigeria come from the oil sector.
Following the economic hardship caused by the removal of fuel subsidy and the depreciating exchange ratio of the naira against the dollar, the Nigerian National Petroleum Corporation (NNPC) Limited on August 16, 2023 secured a $3 billion emergency crude oil repayment loan from the African Export Import (AFREXIM) Bank at the headquarters in Cairo, Egypt.
According to NNPC, the loan was established on a jointly signed commitment letter and Termsheet with the Afrexim bank which will assist the industry in settling taxes and royalties in advance. They further said the loan would equip the Federal Government with the necessary dollar liquidity to stabilise and strengthen the Naira, leading to a reduction in fuel costs.
NNPC added that the $3 billion loan will be repaid against a percentage of income from future crude oil production because the loan is not a crude-for-refined product swap.
Financial experts in the country have reacted to the action taken by the NNPC to obtain the loan and whether or not it will stabilize the foreign exchange market in Nigeria and the future implications.
An economic expert in Akure, Elder Fessy Olabode said it was not the duty of the NNPC to stabilise the exchange rate but that of the Central Bank of Nigeria (CBN) because the apex bank and government failed in action, the NNPC had to step in through the loan.
“The need to stabilize the foreign exchange rate market is important to every country and the CBN, which is best responsible for maintaining the foreign exchange market, was not able to do what it ought to do, NNPC came to their rescue through the loan. The loan is not the usual loan attached to our sovereignty. It is a loan they will pay back through the instrumentality of the supply of crude.
“It Is a good intervention. It is like taking money for the future’s sake because it is necessary to inject some money into the foreign exchange market so that the exchange rate can be stabilised a little. Though it’s not the duty of the NNPC, they decided to help out so that the economy can change.”
Olabode added that there are no future implications as long as Nigeria can meet the required payment of the Loan through the supply of crude.
“Since there was no collateral on it or interest rate to put us off, then it is a way to give the foreign exchange market some soft landing and it has no future implication as long as we can meet the payment of the Loan through the supply of crude, then everything will normalise. The situation on the ground has allowed for the interest of the nation.”
Speaking on the solution to the worsening exchange rate, he echoed that Nigeria should focus on production rather than buying, stressing that importation of petrol should be discouraged.
“The only solution is that Nigeria should start producing instead. We should ensure that there are modular refineries and the old ones should be repaired. Fuel should not be imported again, rather we should depend on our production. Our refineries should be put in good shape for convenient usage. Even the so-called refineries by the illegal militants can be made legal for this course,” he said.
On the contrary, Dr Chris Onfonyelu from the Economics Department at Adekunle Ajasin University said the NNPC loan is not a permanent solution but a short-term one, adding that the terms and implications were not explicitly understandable.
He believed that the government should have tackled the real problem of why the dollar is appreciating against the naira and why people are demanding dollars over the naira.
Speaking on the problems, he said, “The problem is that we are not producing. The economic environment is very harsh. Succeeding through productivity in the real sectors seems to be discouraged. Look at the nominal variable, things are changing. Dollar prices are rising, fuel is deregulated, the financial market money has begun to fall, and inflation is rising.
“All these have an impact on the industry, making competitiveness low, production more difficult, goods less competitive, foreign goods are cheaper than our domestic goods, these are problems and core issues. And the CBN which should be in charge has lost the people’s trust and without trust, monetary policy cannot work.
“Since about two or three days now the Naira has begun to depreciate further. It appreciated about four days after the announcement and after that, it started depreciating. People don’t trust that policy. That policy is not a long-term policy, it’s a short-term, It is a nominal and political policy because it was done rushing. Nobody has come to give us details about the implications.
“For me, what I expect is that the government will look at some of the real variable items, maybe power. Give electricity freely to selected companies and households as a form of subsidy. That would have helped but by giving out money to the executives, no problem is solved. Within a few months, the whole thing is gone, nobody hears about it and the economy continues to get worse.”
Meanwhile, he urged the government to reset the economy and invest in the real sector to address the rising cost of production, adding that power should be subsidized at least for the manufacturing sector, making Forex available even at the import and export window so that it can be accessible and not just parallel market rate.
Oluwadola is an intern from Department of Mass Communication, Adekunle Ajasin University, Akungba Akoko.