Assessing Impact Of Stopping IOCs From Full Forex Repatriation

Following the decision by the Central Bank of Nigeria (CBN) to stop international oil companies (IOCs) from repatriating all their foreign exchange proceeds at once, analysts have said, the move may be counterproductive, leading to a further dampening of foreign investors’ confidence.
Analysts say the move which is aimed at improving foreign exchange liquidity in the country may further lead to more companies leaving the country and a further reduction in influx of foreign investments in the country.

This is coming as foreign exchange inflow at the Nigeria Autonomous Foreign Exchange window (NAFEX) declined by 58.1 per cent to $1.2 billion having surged by 66.7 per cent last week to $2.2 billion after banks complied with the new directives on net open position.
The CBN had, last week, issued a circular barring IOCs from repatriating 100 per net of their foreign exchange proceeds at once. According to the circular, only 50 per cent of forex proceeds can be repatriated at once as it noted that the practice which is known as “cash pooling” has an impact on liquidity in the domestic forex market.

Previously, IOCs were allowed to immediately remit 100 per cent of their forex proceeds abroad, a practice known as “cash pooling.” However, the CBN said the transfer of proceeds of crude oil exports by IOCs operating in Nigeria offshore to fund parent accounts of the IOCs, is impacting liquidity in the domestic foreign exchange market.
Consequently, the CBN had directed banks to limit cash pooling on behalf of IOCs (that is, the transferring of offshore funds to parent accounts) to a maximum of 50 per cent of the repatriated export proceeds in the first instance, and the remaining 50 per cent after 90 days from the date of inflow of export proceeds subject to the fulfilment of all documentation requirements.

The new directive also requires CBN’s approval before repatriating funds and agreements between the parent entities of IOCs and the CBN. Asides this, IOCs must also submit statements of expenditure and evidence of the source of foreign exchange inflow, as well as complete relevant forex forms.
Commenting on the move by the CBN, analysts at Afrinvest West Africa, noted that the move may lead to a further deterioration of the already declining foreign investments. “Though we are oblivious of whether the CBN conducted stakeholders engagement before taking the action, we think that the good intention of the policy may snowball into declining investment flows into the oil and gas sector should mutual understanding be lacking between the CBN and the IOCs on the policy goals.

To analysts at Comercio Partners, this move is part of CBN’s efforts to increase liquidity in the forex market. “However, it may pose challenges for IOCs similar to those faced by operators in the manufacturing and aviation industries, who have experienced delays in forex forward payments. The CBN has recently cleared $2.3 billion of the estimated $7 billion owed, but some multinational companies have already left Nigeria, citing difficulties operating as USD-dominated entities,” they said.
Asides the directive on IOCs’ proceeds, the CBN also directed all authorised dealer banks to restrict PTA/BTA payout to electronic channels only, including debit and credit cards, a move that was commended by analysts.

Afrinvest analysts had stated that “the restriction of PTA/BTA payout to electronic channels would help curtail forex round-tripping activities in that segment. Also, we posit that the upward review of the ceiling on price deviation for exports and imports should favour Nigeria’s exporters in competing markets, given that bilateral trades (even among developed markets) are increasingly driven by pricing incentives.

“While we laud the commitment of the Cardoso-led CBN management to sanitise the forex market, we maintain that a lasting solution to Nigeria’s forex crisis would require similar reform energy from the fiscal side, especially as it pertains to fixing forex supply side problems and blocking of the mass leakages in key government establishments and alleged forex speculation practices by some arms of the executives,” they pointed out.