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Why China Withholds $20b Concession Loan to Nigeria

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  • Why China Withholds $20b Concession Loan to Nigeria

Multiple negative growth recorded in the economy in 2016 has been identified as one of the reasons the Chinese government withheld a $20 billion concession loan earlier promised Nigeria upon due verification.

A top Presidency source privy to the development said the Federal Government had been hopeful that the Chinese government would release the loan last year, given the relationship between the two countries, but expressed disappointment that the money was withheld.

The action of China may well be an indication of the loss of confidence in Nigeria’s credit worthiness by the global financial community. Analysts have predicted that the current economic downturn would dent the country’s credit worthiness. The situation has increased the concern over Federal Government’s ability to borrow the $30billion for infrastructure development, which the National Assembly has refused to approve.

According to the source, government immediately swung into action after the President’s return from a visit to China as well as the follow-up visit of the Budget and National Planning Minister, Udo Udoma, to immediately fulfill the conditions for accessing the loan.

“We were very hopeful that we would secure that loan and other levels of assistance from the Chinese government. This is not to say we have given up though. We had set up an inter-ministerial committee working closely with the Chinese government officials as well as the China Exim Bank experts.

They may have their reasons, but we are determined to fulfill our end of the bargain, and the Federal Government has already appropriated large sums for payment of counterpart funds on key projects to enable us to commence work proper,” the source said.

In 2015, China had, at a summit of the Forum on China-Africa Cooperation (FOCAC) held in Johannesburg, South Africa, pledged a $60 billion assistance to countries on the continent, including Nigeria, to develop and grow their infrastructure and human development capacities.

The move was not surprising as China had remained the continent’s top trade partner for six consecutive years.

The Chinese government said $35 billion had been set aside for concessionary loans, out of which about $10 billion was to go into the China -Africa Fund for Production Capacity. About $5 billion each was earmarked as non-interest grants for China-Africa Development Fund, and special loan schemes for the development of Small and Medium-Scale Enterprises (SMEs) among qualified African countries. The funds were said to have been on ground for prompt disbursement.

The Federal Government had last year planned to raise a total of N2.2 trillion through external borrowings from China and other foreign finance institutions to fund the deficit in the 2016 budget, the implementation of which it said would continue till May 2017.

Unexpectedly, the nation’s Gross Domestic Product (GDP) – which measures the market value of all final goods and services produced in a period, suffered a steady decline from quarter to quarter in 2016, sending negative signals to investors and lowering Nigeria’s credit worthiness in the international financial market.

In the first quarter (Q1) of 2016, the Nigerian economy contracted by -0.36%, followed by further contraction by -2.06% in Q2, even as the slide continued in Q3 to -2.24%.

Hopeful that the concession loan and other categories of financial assistance from China would be approved early, President Muhammadu Buhari led a delegation to Beijing in April last year to make a strong case for the country.

This was, however, not to be, as the Chinese government was advised by its economic experts who visited Nigeria for physical assessments to exercise caution, citing the shrinking economy and falling value of the naira.

They also alluded to high risks in diverting the loan to projects not specified in the agreement and requested a direct monitoring of the projects, in addition to the need for full compilation of all current trade agreements between the two countries till date.

A team of experts from China Exim Bank had also expressed fear of possible mismanagement of the funds and requested an overhaul of some of the priority areas presented by the Federal Government for closer study on their viability and sustainability.

The Chinese financial experts, it was further learnt, expressed reservations about some areas the Federal Government was keen on investing the loan, saying they did not fall in line with the FOCAC vision.

However, a ministry official, who pleaded anonymity said, “All appropriate loan prospecting options by the Federal Ministry of Finance are on course, and are undergoing normal process of negotiation,” without giving further details.

The National Assembly has refused to approve the $30 billion worth of loans until the executive provides details of what they are meant for, even as there are speculations that the refusal was more political than economic as the executive had opposed the provision for constituency projects in the budget.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Fed’s Decision to Hold Rates Stalls Oil Market, Brent Crude Slips to $82.17

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Crude Oil - Investors King

Oil prices faced a setback on Thursday as the U.S. Federal Reserve’s decision to maintain interest rates dampened investor sentiment.

The Federal Reserve’s announcement on Wednesday indicated a reluctance to initiate an interest rate cut, pushing expectations for policy easing possibly as late as December. This unexpected stance rattled markets already grappling with inflationary pressures and economic uncertainty.

Brent crude, the international benchmark for Nigerian crude oil, saw a drop of 43 cents, or 0.5% to $82.17 a barrel, reflecting cautious investor response to the Fed’s cautious approach.

Similarly, West Texas Intermediate (WTI) crude oil also slipped by 46 cents, or 0.6% to settle at $78.04 per barrel.

Tamas Varga, an analyst at PVM Oil, commented on the Fed’s decision, stating, “In the Fed’s view, this is the price that needs to be paid to achieve a soft landing and avoid recession beyond doubt.”

The central bank’s move to hold rates steady is seen as a measure to balance economic growth and inflation containment.

The Energy Information Administration’s latest data release further exacerbated market concerns, revealing a significant increase in U.S. crude stockpiles, primarily driven by higher imports.

Fuel inventories also exceeded expectations, compounding worries about oversupply in the oil market.

Adding to the downward pressure on oil prices, the International Energy Agency (IEA) issued a bearish report highlighting concerns over potential excess supply in the near future.

The combination of these factors weighed heavily on investor sentiment, contributing to the decline in oil prices observed throughout the trading session.

Meanwhile, geopolitical tensions in the Middle East continued to influence market dynamics, with reports of Iran-allied Houthi militants claiming responsibility for recent attacks on international shipping near Yemen’s Red Sea port of Hodeidah.

These incidents underscored ongoing concerns about potential disruptions to oil supply routes in the region.

As markets digest the Fed’s cautious stance and monitor developments in global economic indicators and geopolitical tensions, oil prices are expected to remain volatile in the near term.

Analysts suggest that future price movements will hinge significantly on economic data releases, policy decisions by major central banks, and developments in geopolitical hotspots affecting oil supply routes.

 

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Crude Oil

Nigerian Oil Loses Ground to Cheaper US and Russian Crude

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Nigeria’s once-thriving oil industry is facing a significant challenge as traditional buyers increasingly turn to more affordable alternatives from the United States and Russia.

This shift has led to France emerging as the leading buyer of Nigerian crude, marking a significant change in the global oil market dynamics.

Top Nigerian crude grades like Bonny Light, Forcados, and Brass have long been favored by refineries in Europe and Asia due to their low sulfur content.

However, the country’s primary customers, including India and China, are now opting for cheaper US and Russian oil.

This trend poses a substantial risk to Nigeria, which relies on oil exports for more than half of its foreign exchange earnings.

Data from BusinessDay reveals a stark decline in India’s purchase of Nigerian crude. In the first quarter of 2024, India bought N1.3 trillion worth of Nigerian oil, a significant drop from the average of N2 trillion purchased between 2018 and 2021.

“Buyers are increasingly turning to cheaper alternatives, raising concerns for the country’s revenue stream,” said Aisha Mohammed, a senior energy analyst at the Lagos-based Centre for Development Studies.

The latest tanker-tracking data monitored by Bloomberg indicates that India is buying more American crude oil as Russian energy flows dwindle amid sanctions.

India’s state-owned oil refiners and leading private companies have increased their imports of US crude, reaching nearly seven million barrels of April-loading US oil. This shift is the largest monthly inflow since last May.

Russian crude flows to India surged following the invasion of Ukraine, making Russia the biggest supplier to the South Asian nation.

However, tighter US sanctions have stranded Russian cargoes, narrowing discounts, and prompting India to ramp up purchases from Saudi Arabia.

“Given the issues faced with importing Sokol in Russia, it’s no surprise that Indian refineries are turning toward US WTI Midland as their light-sweet alternative,” explained Dylan Sim, an analyst at industry consultant FGE.

As a result, France has overtaken the Netherlands to become the biggest buyer of Nigerian crude oil, purchasing products worth N2.5 trillion in the first quarter of 2024.

Spain and India occupied second and fourth positions, with imports valued at N1.72 trillion and N1.3 trillion respectively, as of March 2024.

The sluggish pace of sales for Nigeria’s May supplies highlights the market’s shifting dynamics. Findings show that about 10 cargoes of Nigerian crude for May loading were still available for purchase, indicating a reduced demand.

Rival suppliers such as Azeri Light and West Texas Intermediate have also seen price weaknesses, impacting Nigerian crude demand.

“We’ve got much weaker margins, so Nigeria’s crude demand is taking a hit,” noted James Davis, director of short-term oil market research at FGE.

Sellers seeking premiums over the Dated Brent benchmark have found the European market less receptive, according to Energy Aspects Ltd.

“May cargoes were at a premium that didn’t work that well into Europe, but lower offers have seen volumes move,” said Christopher Haines, EA global crude analyst. “Stronger forward diesel pricing is also helping.”

Some Nigerian grades are being priced more competitively, including Qua Iboe to Asia and Bonny Light to the Mediterranean or East, with the overhang slowly reducing, according to Sparta Commodities.

However, the overall reduced demand could lead to a decrease in revenue from oil exports, a major source of income for the Nigerian government.

“Reduced demand could lead to a decrease in revenue from oil exports, a major source of income for the Nigerian government,” warned Charles Ogbeide, an energy analyst with a Lagos-based investment bank.

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Commodities

Refiners Predict Petrol Prices to Fall to N300/Litre with Adequate Local Crude Supply

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The pump price of Premium Motor Spirit (PMS), commonly known as petrol, could drop to N300 per litre once local production ramps up significantly, according to operators of modular refineries.

This projection hinges on the provision of sufficient crude oil to domestic refiners, which they say would undercut the exorbitant costs currently imposed by foreign refineries.

Speaking under the aegis of the Crude Oil Refinery Owners Association of Nigeria (CORAN), the refiners stressed the urgency for the government to ensure a steady supply of crude oil to local processing plants.

They argue that the reliance on imported petroleum products has been economically disadvantageous for Nigeria.

Eche Idoko, Publicity Secretary of CORAN, emphasized that the current high costs could be mitigated by boosting local production.

“If we begin to produce PMS in large volumes and ensure adequate crude oil supply, the pump price could be reduced to N300 per litre. This would prevent Nigerians from paying nearly N700 per litre and stop foreign refiners from profiting excessively at our expense,” Idoko stated.

The potential price drop follows the model seen with diesel, which experienced a significant price reduction once the Dangote Petroleum Refinery began its production.

“Diesel prices dropped from N1,700-N1,800 per litre to N1,200 per litre after Dangote started producing. This is a clear indication that local production can drastically reduce costs,” Idoko explained.

In a previous statement, Africa’s richest man, Aliko Dangote, affirmed that Nigeria would cease importing petrol by June 2024 due to the Dangote Refinery’s capacity to meet local demand.

Dangote also expressed confidence in the refinery’s ability to cater to West Africa’s diesel and aviation fuel needs.

Challenges and Governmental Role

However, achieving this price reduction is contingent on several factors, including the provision of crude oil at the naira equivalent of its dollar rate.

CORAN has advocated for this approach, citing that it would bolster the naira and reduce the financial burden on refiners who currently buy crude in dollars.

The Nigerian government has shown some commitment towards this goal. Gbenga Komolafe, Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), confirmed that a framework has been developed to ensure consistent supply of crude oil to domestic refineries.

“We have created a template for the Domestic Crude Oil Supply Obligation to foster seamless supply to local refineries,” Komolafe stated.

Industry Reactions

Oil marketers have welcomed the potential for reduced petrol prices. Abubakar Maigandi, President of the Independent Petroleum Marketers Association of Nigeria (IPMAN), expressed optimism about the Dangote Refinery’s impact on petrol prices.

“We expect the price of locally produced PMS to be below the current NNPC rate of N565.50 per litre. Ideally, we are looking at a price around N500 per litre,” Maigandi noted.

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