The NNPCL’s plan to borrow $2 billion in crude oil-backed loans from international creditors is aimed at boosting its financial inflow. Mele Kyari, the Group Chief Executive Officer (GCEO) of the NNPC, reportedly informed news agencies that the national oil company is in discussions with international creditors to raise an oil-backed credit facility. The facility will be an addition to the $925 million the country secured in an oil-backed loan from African Export-Import Bank Afreximbank, which had announced its disbursement under the syndicated $3.3 billion crude oil-backed prepayment facility sponsored by NNPC. Kyari had mentioned that the cash raised would be used for all of NNPC’s business activities, including supporting production growth.
Public concern about resource-backed loans is fuelled by Nigeria’s increasing debt profile and the not-so-transparent manner of their procurement. In the first quarter of this year, Nigeria’s debt stock had ballooned by 25 per cent to N121.7 trillion or about N560,000 per citizen, including infants. The consistent growth of the sovereign debt stock leaves much to be desired about the country’s debt sustainability. Indeed, the consequences of a rising public debt for future fiscal stability can only be imagined, especially with the Federal Government spending a whopping 78 per cent of its retained revenue (N7.46 trillion) on debt servicing in the nine months of last year. The high cost of debt interest payments has left the government with little to fund critical capital projects.
As of the end of last September, the government had only released N1.23 trillion for capital projects even as the ministries charged with the implementation held back 21 per cent of the amount and utilised only N962.8 billion as of September 30. By implication, for every N1 released for the much-desired capital projects, N4.7 was funneled into the bank accounts of the government’s creditors as interest rate payments. Last year was not an exceptional case except that while revenue went up in the period, spending on capital projects was cut, by as much as over 30 per cent, compared with 2022’s comparative period. Nothing could be more alarming!
But with the future oil production now being used to secure loans, the situation is even scarier. First, the country is currently spending its future earnings, with which the mounting debts could be serviced or liquidated. Second, it leaves the country with little or no significant investment in critical infrastructure to improve the productivity of future generations, whose shoulders the debt burden will ultimately be transferred to. Besides being a double tragedy for posterity, the impact negates future ability to pay, an underlying principle of debt accumulation.
Already, Nigeria is suffering the repercussions of oil-backed credit deals and other future contracts the NNPCL has signed. For instance, operators of local private refineries have complained of a shortage of feedstock, a challenge that has forced them into sourcing crude from other countries. Less than six months into its operation, Dangote Petroleum Refinery has run into a crisis over the non-availability of crude and has to rely on supply from countries such as Brazil to produce.
But a country with the socioeconomic scares petrol product importation has inflicted on Nigeria in the past years for failing to put its national refineries to work should be concerned that domestic private projects whose commercial viabilities draw from their nearness to the raw material and market are being starved partly because the current production had been sold-off.
When they are transparently negotiated and tied to critical infrastructure, RBLs could help high-inflationary developing countries achieve faster development. But they come with their peculiar risks and pitfalls, especially in countries with weak institutional frameworks that create much room for opacity, a reason the World Bank said they are not cheaper than regular credit lines.
Whereas RBLs are relatively novel to Nigeria’s fiscal space, the handling of the $3.3 billion oil-for-loan deal African Export-Import Bank (Afreximbank) brokered last year leaves much to be desired. It falls short of the transparency required of an agreement of this magnitude. Although RBLs are mostly project-tied as shown by other African countries that have incurred such facilities, there is nothing in the books that shows what Nigeria has achieved with the proceeds of the Afreximbank deal apart from the expectation that it would help with the much-needed liquidity to stabilise the foreign exchange crisis the country has been battling with.
Ghana, Guinea, South Sudan, the Republic of Congo, Angola and Zimbabwe are among African countries that have explored RBLs. However, the countries channeled the facilities to specific projects. For Nigeria, it would have made some difference if NNPCL, which has been struggling to meet its production quota, used the facility to augment production efficiency or exploration.
While NNPCL has not officially confirmed the report that it is seeking another $2 billion crude-backed loan, it would be self-defeating to go on with such an arrangement when the previous one can hardly be defended.
All over the world, RBL is not a one-size-fits-all scheme but borrowers and lenders adopt terms that suit their peculiarities after some compromises are reached. In some scenarios, repayments are fixed in value while in some cases they are volume-indexed. The specific option parties opt for is important especially where the product is extremely volatile in the case of crude. Nigerians, whose common national resource is being traded, deserve to know the details about the baseline scenarios, especially considering that the deals are typically not subjected to legislative approvals.
Except where repayment goes awry, terms of RBL are typically not known beyond the basis such as interest rate. There should be more disclosure on the previous and prospective deals if these kinds of loans cannot be avoided entirely to prevent the Angola experience. Besides, the arrangements must be brought into the country’s broad debt management framework rather than being treated independently. In that way, oil-back loans will align with the country’s debt sustainability template.
Also, the country cannot relegate local needs in its desperation to plug the self-inflicted liquidity crisis. It is late in the day for Nigeria to run a shadowy petrodollar account to finance its way out of the fiscal mess. It should work its way out of it – matching its expenditure with earned incomes while exercising utmost due diligence if it must borrow.
