Afrexim Bank is reportedly offering oil to traders to fund its $3 billion loan to the Nigerian National Petroleum Company (NNPC) Limited. The loan was secured in August as part of the Nigerian government’s efforts to save the naira.
The agreement between the NNPC and Afreximbank is not a crude-for-refined products swap but an upfront cash loan against proceeds from a limited amount of future crude oil production, according to the company.
However, according to sources cited by Reuters, Afreximbank has reached out to traders to assess their willingness to support an oil-backed loan for Nigeria’s national oil company, NNPC LTD. The bank is currently in the process of determining the terms that it will propose to trading houses for this endeavor.
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“There is a lot of interest, but they need to see the conditions,” a senior oil executive with knowledge of the negotiations told sources. The executive noted that increasing oil prices above $90 a barrel would help increase interest, but he asked that his name not be used because he is not permitted to speak publicly on the matter.
The proposed system involves traders receiving actual oil cargoes as payment from financiers. Afrexim Bank is reportedly meticulously calculating the exact quantity of oil that would be allocated to these traders in exchange for their financial assistance.
Cash-upfront traders would be compensated with physical oil cargoes, and the bank is working to establish the specific amount of oil to be allocated to individual traders as part of the funding arrangement.
The Nigerian government is desperately working with its agencies to boost naira’s performance in the FX market. Following the decision of the Central Bank of Nigeria (CBN) to float the naira in June, removing pegs around the dollar as part of reform efforts to create a unified exchange rate, the naira has weakened significantly. The embattled currency has fallen to N1,000/$1 in the parallel market.
Nigeria has outstanding foreign exchange obligations that amount to $7 billion. This, economic experts believe is partly responsible for the woeful performance of the naira in the FX market.
Last week, Finance Minister, Mr. Wale Edun, said the $7 billion backlog needs to be cleared to strengthen the naira.
The collaboration between Afrexim Bank and oil traders presents a unique opportunity to bolster the naira and enhance the country’s financial stability in the midst of the challenging economic situation. The success of this innovative funding approach will ultimately depend on the terms agreed upon and the willingness of traders to participate in the initiative.
The $3 billion is expected to provide a measure of FX liquidity in the Investor & Exporter window. The illiquidity in the official CBN window has driven people to the parallel market, accelerating the rate of the dollar upward.
As of now, neither NNPC nor Afrexim Bank have provided any comments or official statements regarding the development. However, given its potential impact on Nigeria’s currency and economic stability, there is considerable interest and anticipation surrounding this groundbreaking partnership.