Treasury & FX in Nigeria

Commentary

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For many companies, Nigeria is a market you simply cannot ignore: it is Africa’s most populous country, and it has significant natural resources, particularly oil. However, it also has all of the hallmarks of doing business in sub-Saharan Africa: a low score on most measurements of business ethics, a perennial shortage of foreign exchange, and a variety of proposed solutions which are expensive and usually cause issues with the smell test.

The immediate trigger for this call was a recent move by the Nigerian central bank, which devalued the naira and made a move to unify the FX market by eliminating the dual rate system, which provided different official rates according to the use of the funds. The participants in the call welcomed this move, but none was finding it any easier to access foreign currency: the dollar availability is typically a small fraction of the requirement.

The discussion below gives a good feel for this challenging environment. The main discussion points were:

• The key decision is whether to accept the FX loss now, or take it later. Whatever happens, the consensus was that the naira official exchange rate is overvalued, and it will not be possible to get funds out of the country at that rate. Any liberalisation of the FX regime will come at a substantially less favourable exchange rate. For those who use the USD as their functional currency for accounting, this can be an acute problem.
• Linked to this, there was some discussion about the ability to incorporate anticipated future devaluations into your pricing. There are situations where the market will bear this – or may even expect it.
• There is discussion as to whether the situation will improve as the oil price recovers. However, there is not much sign of this happening.
• There are various products which aim to facilitate FX repatriation – at a cost. The leading product here is GDNs (Global Depository Notes), offered by Citi. These basically involve using inward investment flows to access hard currency. Although there is considerable interest, none of the participants is an active user yet – and the substantial discount versus the official rate (up to 20%) is an inhibitor.
• The benefit of using Citi and GDNs is that you can be relatively comfortable that this solution complies with the regulations. There are a variety of exchange bureaux, but they typically do not provide full transparency. The consensus was that it is best to avoid aggressively pursuing anything which may be a grey area.
• One participant has had positive experiences with a couple of lesser known players (Crown Agents and Ballinger), but liquidity is spotty.
• Another participant has moved to using LCs for intercompany shipments into the country, on the grounds that LCs tend to be allocated FX before open account transactions. 
• As always in these cases, participants tend to see an accumulation of local currency, which presents problems with counterparty risk and investment returns. Again, by policy, most people simply accept the poor returns and stay with recognised international banks.

Bottom line: most of the issues here have been around, in one form or another, for a long time – several decades, in fact. Living with them is a cost of doing business in the country. But it is a cost companies are willing to accept.