How Nigeria Intends To Obtain $10 Billion To Resolve The Foreign Exchange issue
The government of Nigeria intends to raise $10 billion to alleviate the foreign exchange crisis that has caused the naira to plummet on the official and black markets, exacerbating a crisis related to the cost of living for households and companies in the most populous country in Africa.
According to BusinessDay, the $10 billion is anticipated to come from two tranches of forward sales by the Nigerian National Petroleum Company Limited (NNPC), which might bring in $7 billion. Qatar is expected to contribute the remaining balance, which will come in the form of a soft loan with no conditions.
According to Dairy Hills Limited CEO Kelvin Emmanuel, the resource-backed loan from Goldman Sachs via NNPC falls under the category of securities lending.
“Goldman Sachs is an external asset manager to the Central Bank of Nigeria (CBN), so using NNPC’s account that CBN manages with Goldman as an unsecured credit line to tap $10 billion for the purposes of clearing outstanding,” Emmanuel said.
He stated that in the near future, forwards and bringing the exchange rate back to the N800 area are both conceivable.
"This implies that WAGPCo and NLNG's petrol revenues will be netted off over an extended period of time to repay back Goldman Sachs' loan through security lending," Emmanuel stated.
The move, he continued, would imply that net external reserves would now read negative, and that the unsecured nature of the facility would probably result in an annual percentage rate of eight percent.
"Since the CBN oversees the oil and gas receipts account for NNPC offshore, the central bank will have to stake gas sales in a forward transaction as collateral."
HOW SECURITIES LENDING WORKS
Global central banks employ security lending as a financial tool to boost their own profits or add liquidity to the market.
Opportunistic lending or trading is the main factor driving demand for securities lending, according to Michael Saunders, head of agency lending for the Americas at BNP Paribas Securities Services.
"You can do that by utilising the cross-currency basis spread trade." According to Saunders in a podcast, this is frequently an indicator of the market's currency scarcity.
He acknowledged that central banks all around the world employ security lending as a helpful instrument to add liquidity to the market, but he expressed reservations about how crucial it is to use it appropriately.
He continued, "A central bank may experience inflation and other issues if it takes on excessive debt through security lending.
NAIRA DECLINES EVEN MORE
Due to the withdrawal of foreign investors from local assets during a period of low oil prices, Nigeria has been experiencing chronic dollar shortages.
The CBN has not yet fulfilled the unfulfilled demand for dollars from foreign investors looking to repatriate their money or from airlines looking to move money overseas from ticket sales. Investors have not yet returned.
The shortages have caused some individuals and companies to shift to the black market, where the value of the naira has fallen to all-time lows and the difference with the official rate has widened.
The minister of finance, Wale Edun, stated on Monday that there was a projected inflow of foreign money worth $10 billion in the coming weeks rather than months, mentioning that President Bola Tinubu issued two executive orders on Thursday that permit the issuance of foreign currency instruments domestically and the transfer of all funds outside the banking system into banks.
He added that liquidity would also come from NNPC crude sales and foreign investment firms willing to invest in Nigeria.
"When these steps are implemented all at once and completely, foreign exchange should start to flow," stated Edun.
On the black market, the naira fell to a record low of 1,200 per dollar on Monday.
At a conference in Abuja, Edun said that all forward contracts signed by the government would be respected, but the governor of the central bank stated that the currency will change as soon as guidelines for market players were established.
Since taking over the country's economy on May 29, Tinubu's administration has found it difficult to stop the currency's fall.
"The inflows will complement other government initiatives to increase foreign exchange liquidity, such as enhancing market transparency and permitting domestic companies to issue foreign exchange instruments," stated Edun.
