EXPOSED: The sleazy face of N306/$ (Updated)

BusinessDay has unravelled what could very well be the biggest FX racket since the days of military dictator Sani Abacha.

Investigations reveal that faceless agents in Nigeria are exploiting the country’s multiple exchange rates to devastating effect and they allegedly have the backing of regulators.
BusinessDay has learnt that these agents, handpicked by the Central Bank for oil and non-oil exporters who need naira to settle domestic administrative obligations from workers’ salaries to overhead costs, could be making exchange rate gains of over N32 billion annually.
Here’s how the racket plays out.

When an exporter notifies the CBN of intentions to buy naira, the regulator recommends an agent who will manage the transaction. The agent then accepts dollars from the exporter in exchange for naira at an exchange rate of N306 per US dollar. This faceless agent then heads to the black market to sell same dollars at N360, helping himself to a gain of N54 per dollar.
BusinessDay estimated these faceless agents to be making no less than N32 billion annually.

That’s how much they pocket from crude oil exporters alone.
The figure could increase another 5 percent if non-oil exporters are factored in, given that oil exports account for 95 percent of dollar inflows into the country while non-oil exports take up the remaining 5 percent.

Five percent will equate to N1.68 billion for a total of N33.68 billion.
The amount these agents make on a yearly basis is enough to build 6,400 housing units in Nigeria’s hinterlands. That’s assuming each unit costs N5 million. It is also enough to provide eight ultramodern hospitals, at an average cost of N4 billion each, across the country.
The inferences are being made because housing and healthcare are two of the most critical yet underfunded sectors in Nigeria.

In making our assumptions, BusinessDay obtained the financial report of indigenous oil company, Seplat, to extract its administrative expenses and render it as a percentage of total revenues.

Seplat’s estimated full-year 2018 revenue is $757 million. In the nine months ended Sept 2018, the company’s revenue was $568 million. That gives a monthly average of $189 million.
The company’s general and administrative expenses totalled $55 million in the nine-month period. The monthly average comes to $18 million. To roughly estimate full-year administrative expenses, we added $18 million to $55 million and arrived at $73 million.
It means 9.6 percent of Seplat’s revenue went to admin expenses.

We assumed that the IOCs spent $505 million in administrative expenses in Nigeria. This we derived by applying Seplat’s administrative expense as a percentage of revenue – 9.6 percent on the total Joint Venture share of the IOCs.

The NNPC in its September 2018 report stated that the IOCs’ JV share totalled N581 billion between September 2017 and 2018, while the Federal Government claimed N924 billion, which implies a sharing formula of 61 percent for the FG and 39 percent for the IOCs.
The report was based on an exchange rate of N306 per dollar, which means the IOCs’ share in dollar terms was $1.9 billion.

To estimate how much of that amount is likely committed to administrative expenses, we calculated 9.6 percent of $1.9 billion, which gave $505 million.
We arrived at this figure after adopting the Seplat model, wherein 9.6 percent of total revenue is spent on administrative costs.

Seplat’s admin costs of $73 million added to the IOCs’ $505 million equals $578 million. At an exchange rate of N306 per dollar, it means the IOCs and Seplat may have spent N176 billion on admin expenses in 2018.

When the N360 per dollar exchange rate is factored in, the amount swells to N208 billion, leaving a difference of N32 billion.

Given that our conservative estimate leaves out the transactions of other indigenous companies, it is safe to assume these faceless agents make no less than N32 billion annually in exchange rate gain.

Our estimate also leaves out non-oil exports, which when roughly estimated translates to a total of N33.68 billion, as stated earlier in the story.

The central bank denied the allegations, arguing that there was “no room for arbitrage”.

“The FX rates across various markets governed and regulated by the CBN, have been converging, leaving no room for arbitrage opportunities in Nigeria’s FX market,” the apex bank said in a statement Monday.

“The FX arbitrage in the country is hardly the best-kept secret,” a source who did not want to be named told BusinessDay.

“Every bank chief executive officer knows about it, but the fear of the regulator keeps them mum,” the source said.

Two other sources confirmed they were also aware of the dealings.
“Every large importer of dollars who goes through the official channel is a victim,” one of the sources said.

“The arbitrage opportunity is the reason why the N306 rate still exists, when most market transactions happen at the N360 rate,” the second source said.
Treasury sources tell BusinessDay that the practice has forced some exporters to circumvent official channels in order to get a market-reflective rate for their dollars. That has curbed dollar supply, piling pressure on the exchange rate.

To address the rising tide of exporters boycotting official channels, the Central Bank has threatened to sanction the banks.

According to sources familiar with the matter, the CBN is convinced that the banks could be helping some of their clients divert their dollars and is bent on discouraging that.
“The CBN is penalising banks whose clients don’t bring their dollars through official channels,” a source said. “The banks argue that it is not their fault if clients are bent on diverting their money.”

The diversion threatens to take the country back to a period in 2016 when exporters and Nigerians in the diaspora side-stepped official channels because of the country’s long-standing naira peg of N199 per dollar.

The black market rate at that time was as high as N300 per US dollar, yet the CBN forcefully exchanged dollars at the N199 rate, denying individuals and businesses, whose costs were anchored on the black market rate, of a spread of N101.

The impact was an acute dollar shortage that contributed to Nigeria’s first economic recession in 25 years.

“It is perhaps the biggest FX racket since the days of Abacha,” one of our sources said.
In the early 1990s, Abacha gave dollars away to his cronies at an official exchange rate of around N20 per dollar when the parallel market rate was anywhere between N70 and N80 per dollar, creating an arbitrage opportunity of between N50 to N60 per dollar.

LOLADE AKINMURELE