February 16, 2024/CSL Research
In a circular issued yesterday, the Central Bank of Nigeria (CBN) highlighted its observation regarding the transfer of proceeds from crude oil exports by International Oil Companies (IOCs) operating in Nigeria. It noted that these funds are swiftly moved offshore to the parent accounts of the IOCs upon receipt, subsequently affecting liquidity in the domestic foreign exchange market. While acknowledging the importance of facilitating easy access for IOCs to their export proceeds, especially to fulfill their offshore obligations, the CBN emphasized the necessity of minimizing adverse effects on liquidity within the Nigerian foreign exchange market. In response to these concerns, the CBN has introduced the following policies to address the issue.
- Banks are allowed to pool cash on behalf of IOCs, subject to a maximum of 50% of the repatriated export proceeds in the first instance.
- The Balance 50% may be repatriated after 90 days from the date of inflow of export proceeds.
Furthermore, the apex bank expects the following documentation from IOCs.
- Prior approval of the CBN for the repatriation of funds under the Cash pooling transaction
- Cash Pooling agreement with the parent entity of the IOCs operating in Nigeria.
- Statement of expenditure incurred by the IOCs in the immediate past period relating to the “Cash Pooling”.
- Evidence of the source of FX inflows
- Completion of relevant forex form(s) as required under extant regulations.
What this means for IOCs
Cash pooling is a financial management strategy employed by businesses, including international oil companies (IOCs), to optimize their cash resources and enhance liquidity. The process of cash pooling typically involves consolidating cash balances from various subsidiaries or entities within a corporate group to centralize control over cash management. Essentially, the IOCs are being forced to maintain a 90-day fixed term deposit of 50% of their export proceeds, which would impact the quantum of cash pooled from the Nigerian operations. Generally speaking, imposing this restriction on their Nigerian operations could result in;
Delayed cash flow and reduced liquidity: If IOCs face difficulties repatriating funds promptly, it can lead to delayed cash flows and reduced liquidity. This may impact their ability to invest in new projects, meet financial obligations, or respond quickly to changing market conditions.
Potential disincentive for Investments in the oil sector: Tightening regulations on forex remittance has the potential to serve as a deterrent for foreign investments in Nigeria’s oil and gas sector. Factors such as rising insecurity and a surge in oil theft have prompted major international oil companies (IOCs), spearheaded by Shell, to steadily divest from the Nigerian hydrocarbon industry for more than a decade. In our perspective, implementing more stringent capital controls would be an additional challenge that could intensify their inclination to exit, adding to their existing concerns. With this new policy, IOCs will probably join the list of FPIs and players in the aviation and other industries who struggle to repatriate their funds.
Implication for the FX market; Again, we see minimal impact on FX liquidity.
We believe these further directives from the CBN are targeted at increasing liquidity in the FX market where rates have plummeted to as low as ₦1498.25/US$ at the official market and ₦1600/US$ at the parallel market.
In our view, forcing IOCs to maintain a 90-day fixed term deposit with banks will not translate directly into increased liquidity in the FX market. While we believe this will increase FCY deposits with banks which can be deployed for FCY lending and other investment opportunities.
In our view, if these funds cannot be deployed at the I&E window to meet Naira backed demand, then the impact on FX liquidity can only be minimal. For instance, we can see this creating liquidity in the market if the CBN can lend these funds from banks and increase intervention in the Forex market. This will likely give the CBN access to a large quantum of funds (50% of the initial export proceeds) at little or no cost, as subsequent proceeds after the first 90-day cycle will pay off the initial borrowing.
Impact on the stock market; Negative signal to FPIs
In recent years, there has been a noticeable lack of enthusiasm among foreign investors when it comes to Nigerian equities, and we do not foresee a substantial resurgence in their engagement in the current year. Our anticipation is grounded in the expectation that this sentiment will persist until there is a significant enhancement in clarity and transparency within the foreign exchange market.
The heightened volatility in the foreign exchange (FX) arena, coupled with challenges in repatriating funds, has discouraged foreign portfolio investments from active participation in the Nigerian stock market. From our perspective, the recent directive from the Central Bank of Nigeria (CBN) only serves to reinforce a negative signal to foreign investors, suggesting potential difficulties in retrieving their funds should they decide to invest in Nigeria.
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