The Nigerian government is planning to raise $10 billion to address the country’s foreign exchange crisis that has sent the naira tumbling on both the official and parallel markets, worsening a cost-of-living crisis for businesses and households in Africa’s most populous nation.
BusinessDay’s findings showed the $10 billion is expected to be sourced from two tranches of forward sales by the Nigerian National Petroleum Company Limited (NNPC) which could yield $7 billion while the additional balance is expected from Qatar, which will provide a soft credit without strings.
Kelvin Emmanuel, chief executive officer of Dairy Hills Limited, said the resource-backed loan from Goldman Sachs through NNPC can be classified as 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 noted that forwards and stabilising the exchange rate back to the N800 range are plausible within the short term.
“This means Goldman Sachs’ loan through security lending will net off gas revenues from WAGPCo and NLNG over an extended period to repay back,” Emmanuel said.
He added: “The implication of such a move is that the net external reserves will now read in negative, and the unsecured nature of such a facility will most likely attract an annual percentage rate of 8 percent.
“This means that the central bank will have to stake gas sales in a forward transaction as collateral since the CBN manages the oil and gas receipts account for NNPC offshore.”
How securities lending works
Security lending is a financial instrument used by central banks around the world to inject liquidity into a market or increase their own returns.
According to Michael Saunders, head of agency lending for the Americas at BNP Paribas Securities Services, the major demand driver for securities lending is opportunistic lending or trading.
“That can be achieved by taking advantage of the cross-currency basis spread trade. Often, this is a measure of dollar shortage in the market,” Saunders said in a podcast.
He noted that security lending is a useful tool by central banks around the world to inject liquidity into the market; he however raised concerns about the importance of using it responsibly.
“If a central bank borrows too much money through security lending, it can lead to inflation and other problems,” he added.
Naira slumps further
Nigeria has faced chronic dollar shortages after foreign investors exited local assets during a period of low oil prices.
Investors are yet to return and the CBN has not settled outstanding demand for dollars from foreign investors seeking to repatriate funds or airlines seeking to send money from ticket sales abroad.
As a result of the shortages, some businesses and individuals have turned to the black market, where the naira has hit record lows, widening the gap with the official rate.
“There is a line of sight on $10 billion worth of inflow of foreign exchange in a relatively near future, in weeks rather than months,” Wale Edun, minister of finance, said on Monday, adding that President Bola Tinubu on Thursday signed two executive orders to allow domestic issuance of instruments in foreign currency and also allow all cash outside the banking system to be brought into the banks.
He added that liquidity would also come from NNPC crude sales and foreign investment firms willing to invest in Nigeria.
“These measures taken as a whole and comprehensively should lead to the flow of foreign exchange,” Edun said.
The naira hit a record low of 1,200 per dollar on Monday on the black market.
Edun told a conference in Abuja that all forward contracts entered into by the government would be honoured, while the central bank governor said the currency would adjust once rules for market participants were made clear.
Tinubu’s government has been struggling to stem the decline in the currency since it took the helm of the economy on May 29.
“The inflows will add to other steps being taken by the government to boost foreign-exchange liquidity, including improving market transparency and allowing domestic entities to issue foreign-exchange instruments,” Edun said. (BusinessDay)
