Nigerian companies have devised a smart way of circumventing central bank guidelines to sell forex in the official market but at black market rates.
On February 2022, the central bank launched its RT 200 program aimed at raising over $200 billion in forex over the next “3-5 years” from exporters. The program is aimed at non-oil exporters who export semi-finished or finished goods and repatriate the funds via the importers and exporter windows.
To encourage participation in the market, the CBN offers companies who repatriate their forex for third-party usage an additional incentive of N65 for every dollar repatriated while those who sell for their own usage get N35 for every dollar sold.
However, sources with knowledge of how the policy is being implemented suggest some of the companies who participate in the policy have found a way around selling at black market rates but still pocket the CBN incentives.
Several sources who spoke with Nairametrics, suggest the companies repatriate the forex into the official Investor and Exporter window, collect their incentive but still end up collecting the differential between the official and black market rates (“the spread”) outside of the window.
Worsening exchange rate situation
Nigeria’s exchange rate has depreciated by over 25% in the last year as a slew of CBN policies fail to bridge the gap between the parallel and official exchange rates.
- When the CBN introduced the RT 200 policy in February this year, the exchange rate was N580/$1. About nine months down the line, the exchange rate has depreciated to N710/$1.
- Companies have resorted to the black market or at least paying the black-market rates because of the spate of scarcity.
- According to several sources who asked not to be named for fear of being victimized, suggest that the companies paying above the official rate, are more comfortable buying in the I&E window due to the authenticity of the source of inflow even if it means paying an extra spread.
How it is done
It often starts with a bid from a company sourcing forex via their banks on official channels such as the I&E Window.
- Once the bid is received, a seller on the other side that can match the forex is contacted by their own bank.
- The exchange rate on the official market is then used as the price of the transaction for official purposes.
- The difference between this price and the black-market exchange rate is then used to sell off-market by the representative banks of both the buyer and seller respectively.
- For example, the company that repatriates $1 million will sell at the official rate of between N416-N440/$1, collect their N65 incentive and then get the buyer of the forex to settle the difference between the official rate and the black-market rate of over N700/$1.
In most cases, the terms of the transaction including the actual exchange rate is determined days ahead of when the bid is tabled in the market.
As one source explained, “for you to be on the list, the exporter or seller of the forex needs you to have settled the difference (black market less the official rate) off-market at the black market into a designated account for the buyer to get on the list then get matched with as the buyer that the exporter will sell to via the window.”
- Our sources suggest this practice is widespread and is seen as an acceptable way to comply with CBN guidelines but still sell at parallel market rates which many still consider the closest reflection of reality.
- The sentiments out there also suggest traders do not see these transactions as illegal or contravention of central bank rules.
- According to one trader, “It will be foolhardy for anyone CFO not to take the spread between the official and black-market rate. This is not about corporate governance; it is doing what is best for your business”
We also inquired about how transactions like these are reported by accountants seeing that it can be a financial jigsaw.
- The forex situation has placed companies in a situation where accountants have to walk the fine line around being financially responsible from the point of view of regulators versus their shareholders.
- Sources suggest companies who sell, classify the spread as other income in their financial statements while those who buy, classify it as part of its exchange rate losses or other expenses.
- External auditors will also face the challenges of complying with international financial accounting principles when auditing journal entries for forex transactions.
It is also difficult for the apex bank to complain as their goal of encouraging liquidity in the forex market is still being met. Unfortunately, the efforts made at improving liquidity in the forex market are not bringing down rates as several factors outside of its control persist. For example, higher inflation, a stronger dollar, drastically reduced capital importation, and lower non-oil export proceeds remain a major drag in Nigeria’s forex challenges. There is little to nothing the central bank can do about this for now.