Explainer: NNPC, Afreximbank $3bn Crude Repayment Loan

By Adedapo Adesanya

Nigeria’s state-owned oil company, the Nigerian National Petroleum Company (NNPC) Limited yesterday announced a $3billion loan from Africa Import and Export Bank (Afreximbank) against royalties from future oil production, as a temporary measure to improve dollar supply to the uniform foreign exchange window.

In a statement late Wednesday, the NNPC limited said the “NNPC and Afreximbank have jointly signed a commitment letter and term sheet for an emergency $3bn crude oil repayment loan.”

According to the statement, the “signing which took place today at the bank’s headquarters in Cairo will provide some immediate disbursement that will enable the NNPC limited to support the Federal government in its ongoing fiscal and monetary policy reforms aimed at stabilizing the exchange rate market.”

While this has helped propped up the local currency with the Naira gaining on the Dollar and other currencies, many gray areas remain about the deal. This explainer provided by the presidency and the NNPC will help make sense of pertinent questions:

1. What is the $3 billion loan about?

The NNPC Limited secured an emergency $3 billion crude oil repayment loan from AFREXIM Bank. This is not a crude-for-refined products swap but an upfront cash loan against proceeds from a limited amount of future crude oil production.

2. Is this loan risky for NNPC Ltd or the Nigerian Treasury?

No. The exposure for NNPC Ltd. is very limited, covering just a fraction of their entitlements. Additionally, there are no sovereign guarantees tied to this loan.

3. What’s the benefit of this loan to Nigeria?

The loan will assist NNPC Ltd. in settling taxes and royalties in advance. It will also equip the Federal Government with the necessary dollar liquidity to stabilize the Naira, with limited risk.

4. How will the loan be disbursed?

The funds will be released in stages or tranches based on the specific needs and requirements of the Federal Government.

5. Will this affect fuel prices?

A strengthened Naira as a result of this initiative will lead to a reduction in fuel costs. This means that if the Naira appreciates in value, the cost of fuel will drop and further increases will be halted.

6. What about subsidies? Are they coming back?

No. A stronger Naira will result in lower prices from the current level, making subsidies unnecessary. The deregulation policy remains unchanged.

7. How will the loan be repaid?

The loan will be repaid against a fraction of proceeds from future crude oil production. It’s a strategic move that ensures a balance between our current economic needs and future production capabilities.

8. What is the difference between this and previous swap deals?

This is not a crude for refined products agreement where the government does not earn any proceeds from the swap.

Meanwhile, market analysts and fiscal experts worry that this measure won’t help clear the large backlog that the country is faced with in the long term as this will only provide succour in the short term.