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Kalu Aja Profile picture
@FinPlanKaluAja1
Oct 4, 2020 • 6 tweets • 2 min read • Read on X
In April 2006, Nigeria paid off all her foreign debt.

It was a good deal, Nigeria essentially paid $12b to settle over $30b in debt, in effect an over 50% discount.

Should Nigeria have used $12b to build rails or pay debt?

A very short trend
Borrowing is front loaded consumption.

When Nigeria Borrowed $30b (principal plus interest) she essentially consumed "tomorrow's $30b earnings "today".

To repay, Nigeria has to take current earnings and apply to current obligations.

What are the current earnings? Crude oil
Let's step back, did Nigeria actually borrow $30b?

No

$30b represented principal and accrued intrest..As long as a loan were "open", intrest accrued.

The debt had ballooned not because Nigeria borrowed more but that Nigeria serviced the loan less
..
What would have happened in 2007 if Nigeria owned $30 and crude oil fell to $30b

Well Nigeria will simply restructure $ loan, incurre more intrest and "management fees"

The problem is simple, Nigeria means of repayment (crude oil) is sold at a price Nigeria does not control.
Paying off the foreign currency denominated loan eliminated a huge contingent liability for Nigeria.....at a 50% discount.

That 'light" debt sheet was a key reason Nigerian sovereign bonds were priced and added to the JP Morgan Bond index, because debt to revenues were low.
In summary, a $30b debt today plus subsequent foreign currency borrowings would have sucked every cent from the Central Bank of Nigeria to simply meet $ interest payments.

The Naira would have no support and imports and trade would have stalled.

Thank you

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More from @FinPlanKaluAja1

Kalu Aja Profile picture
Feb 5
On Domm Accounts, Please Cease and Desist

In May 1998, The Government of Pakistan froze all foreign currency accounts (FCA) estimated to hold $7.56b in an emergency action declared to protect the economy.
The Government of Pakistan instructed banks to pay Pakistanis receiving $ salaries from offshore companies in local currency at inter-bank rates. All dollar assets were converted to the local currency.

The effect of these actions was devastating to the economy of Pakistan.
The primary impact was a loss of confidence in Pakistan's Government, which was evident in many ways, including private sector remittances stopping completely, with Pakistan losing $2.5b in remittances projected inflow for that year.
Read 16 tweets
Kalu Aja Profile picture
Feb 1
NNPC Ltd Project Gazelle Funding Limited Explainer

1. Nigeria needs forex to settle her FX obligations including an outstanding obligation of over $7b; thus, the NNPC arranged a $3.3b emergency loan from AFRIEXIMBANK (AFEX) on behalf of the Federal Government of Nigeria.
2. The loan structure involves the NNPC Limited receiving cash today via an SPV called Project Gazelle Funding Limited, sponsored by the NNPC Limited. The NNPC promises to repay AFEX with crude oil, equivalent to the principal borrowed plus an interest element of 11.85% APY.
3. The NNPC Limited borrowing is backed by its future sales of crude oil.
Read 13 tweets
Kalu Aja Profile picture
Jan 2
Let us talk about inflation and my small town in a Local Government Area called Ohafia in Abia State.

My Town In Ohafia
In my town, there is one big shop. It's got everything: groceries and also a fridge. In the evenings, locals gather for a cold beer in front of the shop.
It's the "mall", the centre of entertainment.

In regular times, prices in that shop reflect prices in Nigeria with a bit of margin for the cost of transportation. My town is an agrarian community with little disposable income.
The shop owner knows that prices cannot be sky-high because the residents can't afford to spend large sums on imported luxuries. The shop sells local palm wine and Nigerian beer, no foreign brands; why?
Read 31 tweets
Kalu Aja Profile picture
Jun 21, 2023
Urban Myths

1. Local refining will reduce the cost of local PMS. FALSE. PMS pricing is based primarily on the cost of crude priced in $, not the cost of refining

2. Currency float will make $ flow in. FALSE. A float is a necessary but not sufficient measure to attract $ inflow
3. A strong currency translates to a strong economy. FALSE. A Strong currency means exports from that county are not competitive. Exports boost GDP and a weak currency makes exports competitive.

South Korea and Japan have weak currencies
4. Imports are bad. FALSE.

The largest importer on earth is China, largest exporter on earth is China. What boosts GDP is net exports. Nations can import goods they have no comparative advantage in and export goods they have a comparative advantage in, just export more
Read 4 tweets
Kalu Aja Profile picture
Jun 19, 2023
What most have missed is the peg, they see only the devaluation

Peg removal means the Naira can go to $1:1000 or $1:300

It's now based on Supply of $.

If remittance people vex and send $25b in August alone then $1: becomes N300

If it devalues, it means it can appreciate.
The difference is in the past CBN tried to make it appreciate by restricting demand, thus your naira card stopped working

Now the strategy is to focus on Supply (SS) by incentivizing holders of $ to inflow to Nigerian banks at the market rate

It won't happen in 1 month
Your naira card can only work when the banks are able to recreate a forward pricing mechanism to bid for Forward $ sales

That's what will attract Foreign Portfolio Investors to inflow. It's that inflow that makes your naira card work abroad

So step by step
Read 5 tweets
Kalu Aja Profile picture
Jun 16, 2023
1. CBN removes peg, so CBN rate is market driven

2. CBN is not the "market" , FMDQ/banks/BDC are the market, the determine prices via demand and supply

3. You want $, you go to your bank, you bank gives you bid and offer based on their $ supply, that's the bank rate.
4. Your bank card will work IF your bank has sufficient credit to fund your card. Its no longer CBN funding, it's banks/BDC buying and selling

5. CBN is publishing the "average" of what the banks and BDCs sell. It won't reflect equally immediately, supply is lagging
6. A float can mean a devaluation (down) or an appreciation (up)

It's supply that determines.

If FPI investors see that Nigerian eurobonds are discounted, they may inflow $ and Naira appreciates

7. The issue is not peg or float but supply
Read 5 tweets

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