The official documentation states that
The device-local network (localhost) is also guarded by this permission, which is important for preventing apps from using it to communicate between profiles.
However, I recall the official GrapheneOS account mentioning that apps with the network toggle disabled still have access to the loopback interface. I may be mistaken, and it could have been a different issue related to the lo interface.
Another question concerns the purpose of the network toggle - what is it designed for? It doesn't prevent data exfiltration, since IPC remains available and could potentially be used to transfer data such as telemetry, ads, or benign content.