When Charles Azubike (not real name) and his team did the costing for an international donor-funded community project, it was premised on the prevailing foreign exchange rate of N360 per US dollar.
When the money came, approximately $50,000, their local bank denied a request to release the naira equivalent of the money at the prevailing market rate of N360 per dollar and balked at releasing the funds in dollars, citing an instruction that emanated from the central bank. They could only get regulatory approval for a disbursement at N305.9/$.
The transaction dealt a blow on the project as it meant Azubike and his team had to give up N3 million in FX conversion loss. They had just got N15 million (using the N305.9/$ rate) despite making plans for N18 million (N360/$).
“It created a setback for us given our estimations were done at N360/$,” Azubike told BusinessDay in an interview.
“It was difficult to accept but there was nothing we could do, no one was willing to tell our story, they seemed scared, until the BusinessDay article yesterday,” Azubike added.
He didn’t provide any more details on the deal.
Azubike was one of several people, from senior executives of oil firms to private equity investors, who said they had been shortchanged by the N306 rate.
In an article published Monday, BusinessDay took the veil off a forex arbitrage that has been fanned by the N54 per dollar spread between the official N306/$ rate and the market-reflective N360/$ rate.
It was about how Nigeria’s oil firms are made to sell their dollars without competitive bid.
The scheme ensures that oil firms and other organisations that sell their dollars on the instructions of the NNPC lose over N32 billion ($89 million) annually. The money is enough to provide over 6,000 housing units for homeless Nigerians and build eight ultramodern hospitals that could reverse the $1 billion annual health tourism spend by Nigerians denied of quality healthcare on their home soil.
The story was a follow-up to a previous article which examined the CBN’s long-standing N306/USD exchange rate which has now remained for the third year running despite being inaccessible to the bulk of businesses and households.
However, the central bank denied the allegations, arguing that there was “no room for arbitrage”.
“The FX rates across various markets governed and regulated by the CBN have been converging, leaving no room for arbitrage opportunities in Nigeria’s FX market,” the apex bank said in a statement Monday.
Nigeria’s multiple FX rates have converged to some extent, but still range between the N306 rate, quoted on the CBN’s website and adopted by the Federal Government for its annual budget, and the N360/$ rate in the parallel market.
This creates a N54/$ spread which is being exploited to devastating effects by faceless people able to lay their hands on the N306 rate.
The CBN’s denial of the arbitrage opportunities in the market came as a surprise to many who asked questions of the apex bank’s FX market transparency.
“Denials ring hollow when the CBN/Bankers Committee no longer publishes detailed data on forex sales (how much, when, to whom, for what purpose),” said Matthew Page, a former US intelligence community’s top Nigeria expert.
“Such information ranks among the most secret/tightly guarded in Nigeria. Why hide what was once openly published?” Page said via his twitter handle Monday.
Every market player, from commercial banks to investors, uses the more market-reflective N360-N363 per dollar exchange rate. Even the CBN makes dollar interventions at around N354 per dollar.
The CBN’s spokesperson, Isaac Okorafor, did not respond to earlier emails seeking answers to why the CBN continues to keep the rate.
Until state-owned oil firm, Nigerian National Petroleum Corporation (NNPC), became the sole importer of petroleum products into Nigeria, the CBN justified the N306/$ rate by saying it was necessary to keep petrol prices low, meaning dollars were sold at a cheaper rate to independent importers.
Now that the independent petrol importers have downed tools and left the responsibility to the NNPC, the rationale for keeping the rate is fast fading, yet it remains.
The states are also adversely affected by the maintenance of the N306/$ rate. The dollar portion of federal allocations to the states is converted at the N306 rate instead of the prevailing N360 market rate.
That implies that for every dollar of federal allocations due to the state, N54 is lost. State governors had complained about the practice but have since grown quiet.
BusinessDay calculations show that the states could have earned 17 percent more if the N360 exchange rate were applied.
The Federation Account Allocation Committee (FAAC) disbursed the sum of N2.57 trillion to the states in 2018, according to the National Bureau of Statistics (NBS).
Federal allocations are largely made up of crude oil export sales and Petroleum Profits Tax (PPT) as well as revenues from Value Added Tax (VAT), Import and Excise Duties, Royalties and Companies Income Tax (CIT).
Crude export sales and PPTs account for nearly 70 percent of total allocations, which would equate to N1.79 trillion of allocations to states in 2018 ($5.8 billion at N306).
If converted at N360 per dollar, state allocations would be N2.1 trillion, 17 percent more than the 2018 value.
There is a long list of expenditure items that the states could address with the extra cash from FX revaluation gains, from investments in infrastructure to payment of workers’ salaries.
That case has been strengthened by a likely minimum wage hike to N30,000, which is sure to put a strain on the finances of the states, most of which are barely able to generate enough income to meet their costs.
LOLADE AKINMURELE
