Move May Impact Foreign Investor Confidence and Dampen Investment Inflow
Following the Central Bank of Nigeria’s (CBN) recent decision to limit international oil companies (IOCs) from repatriating all their foreign exchange proceeds at once, analysts have voiced concerns that this move might be counterproductive, potentially leading to a further decline in foreign investors’ confidence.
The decision, aimed at improving foreign exchange liquidity in the country, could result in more companies leaving Nigeria and a reduction in the influx of foreign investments. The foreign exchange inflow at the Nigeria Autonomous Foreign Exchange window (NAFEX) has already witnessed a 58.1% decline to $1.2 billion, following a surge of 66.7% to $2.2 billion last week as banks complied with the new directives on net open position.
The CBN’s circular issued last week restricts IOCs from repatriating 100% of their foreign exchange proceeds at once. Instead, only 50% of forex proceeds can be repatriated immediately, citing concerns about the impact of the practice known as “cash pooling” on liquidity in the domestic forex market.
Previously, IOCs could remit 100% of their forex proceeds abroad immediately, but the CBN argued that this was impacting liquidity in the domestic forex market. The directive now limits cash pooling on behalf of IOCs, allowing a maximum of 50% of repatriated export proceeds initially, with the remaining 50% after 90 days, subject to documentation requirements.
The new directive mandates CBN approval before repatriating funds, agreements between parent entities of IOCs and the CBN, submission of expenditure statements, evidence of the source of foreign exchange inflow, and completion of relevant forex forms.
Analysts at Afrinvest West Africa noted that while the policy has good intentions, a lack of mutual understanding between the CBN and IOCs on the policy goals may result in declining investment flows into the oil and gas sector. Comercio Partners analysts highlighted that the move could pose challenges for IOCs, similar to those faced by other industries experiencing delays in forex forward payments.
In addition to the directive on IOCs’ proceeds, the CBN has directed authorized dealer banks to restrict PTA/BTA (Personal Travel Allowance/Business Travel Allowance) payout to electronic channels only, including debit and credit cards. Analysts commended this move, noting that it would help curtail forex round-tripping activities. They also emphasized the need for comprehensive fiscal reforms to address Nigeria’s forex crisis, focusing on fixing supply-side problems and preventing leakages in key government establishments and alleged forex speculation practices.