Nigerian firms have devised a clever method of circumventing central bank guidelines to sell forex in the official market at black market rates.
The central bank launched its RT 200 program in February 2022 to raise over $200 billion in forex from exporters over the next “3-5 years.” Non-oil exporters who export semi-finished or finished goods and repatriate funds through the importer and exporter windows are targeted by the program.
To encourage market participation, the CBN provides an additional incentive of N65 for every dollar repatriated for third-party use. In contrast, those who sell for their own use receive N35 for every dollar sold.
However, sources with knowledge of how the policy is being implemented indicate that some companies participating in the policy have discovered a way to avoid selling at black market rates while still pocketing CBN incentives.
Worsening exchange rate situation
Nigeria’s exchange rate has depreciated by over 25% in the last year as many 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 later, the exchange rate 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 forex buyer 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 here suggest traders do not see these transactions as illegal or contravention of central bank rules.
- According to one trade, “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 financial 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. In contrast, 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 central bank to complain because their goal of encouraging liquidity in the forex market continues to be met. Unfortunately, efforts to improve liquidity in the forex market are not lowering rates because several factors beyond its control remain. Higher inflation, a stronger dollar, drastically reduced capital imports, and lower non-oil export proceeds, for example, continue to be major drags on Nigeria’s forex challenges. For the time being, the central bank has little to no options.
