Introduction
On June 14, 2023, the Central Bank of Nigeria ("CBN") issued a press release ("Press Release") to authorized dealers and the general public, concerning changes to be implemented in the operation of the Nigerian Foreign Exchange Market (the "FX Market"). A key change reflected in the Press Release is the absorption of the different segments of the FX Market into the Investors and Exporters Window ("I&E Window") and the re-introduction of the "Willing Buyer and Willing Seller" model in the I&E Window. These changes which became effective on the date of publication of Press Release, are in tandem with President Ahmed Bola Tinubu's key economic policies which he announced during his inaugural ceremony on May 29,2023.
Our newsletter will give insights on the provisions of the Press Release and the major implications.
Major Provisions of the Press Release
1. Abolition of the segmentation in the Forex
Market: By virtue of the Press Release, the CBN has
abolished all other segments of the Forex Market excluding the
I&E Window. These segments have now been absorbed by the
I&E Window, which is by implication the official foreign
exchange window in Nigeria.
Key segments abolished by the Press Release include windows through
which the CBN intervened in the Forex Market to boost liquidity
through the sale of foreign currency to authorized dealers for sale
at the CBN's official rates. These windows include the
Secondary Market Intervention Sales (SMIS) Window (for entities
such as importers of raw materials and machineries, entities
involved in agriculture etc); the Invisibles window (this catered
to individuals that required foreign exchange for Business and
Personal Travel Allowances (BTA/PTA), school fees, hostel
accommodation, maintenance allowance and medical expenses abroad)
e.tc.
2. Re-instatement of the "Willing Buyer and Willing Seller" Model– By virtue of the abolishment of all other foreign exchange windows, entities that wish to purchase foreign currency are required to do so through the I&E Window. While, the participants, were previously required to sell foreign currency at the CBN rate, the CBN has announced that the foreign exchange rate at the I&E Window would be determined using the "Willing Buyer and Willing Seller" Model (the "Model").
The Model, which was earlier introduced by the CBN in the year 2017 permits the buyer and seller of foreign currency to agree on an exchange rate. This implies that the rate of foreign exchange in the Forex market, would now be determined by market forces of demand and supply.
3. Abolition of the CBN's Dollar Rebate Schemes– On March 5, 2021 and February 25, 2022 respectively, the CBN launched the: Naira4Dollar Remittance Scheme (which allowed for payment of N5 for every dollar remitted); and the RT200 Rebate Scheme. .
It is worthy of note that the CBN abolished these scheme, effective June 30, 2023, as they have become redundant. This is due to the fact that exporters of non-oil proceeds and other beneficiaries of the rebate scheme will no longer need to be persuaded to inflow their foreign currency into Nigeria in view of the Model.
Implications of the Press Release:
1. Foreign Exchange Market
With these changes, the foreign exchange rate will now be
determined by the market forces of demand and supply. In view of
this, it is expected that sellers and buyers of foreign currency
will be encouraged to conduct their transactions through the Forex
Market.
Please note, however, that only eligible foreign exchange
transactions can be funded through the I&E Window. Examples of
eligible transactions include Contract Service Fees (including
consultancy fees, directors' fees e.t.c.), profits and
dividends, remuneration for expatriates, importation of visible
goods (Form M) e.t.c.1 Entities that intend to fund
transactions that are ineligible for foreign exchange are still
required to source for foreign currency outside the I&E
Window2.
2. Repatriation of Proceeds of Foreign Investment
It is advisable that foreign investors that wish to invest in
the Nigerian market comply with the following as nothing in the
Press Release abolishes these requirements:
a. all investments should be inflowed through an authorized dealer.
Investors should and obtain a Certificate of Capital Importation
evidencing the inflow; and
b. all technology transfer agreements should be registered with the
National Office for Technology Acquisition and Promotion (NOTAP).
Please see our newsletters on obtaining a CCI and registering
technology Transfer Agreements here.
It is important to note that the foregoing would now be done to
comply with regulatory obligations as the applicable rate for the
purchase of foreign currency would be the prevailing market rate at
the I&E Window.
Conclusion
The unification of the Forex Market and the introduction of the Model is a welcome development for foreign and local businesses in Nigeria. Over the years, a number of foreign investors have refrained from investing in the Nigerian market due to repatriation difficulties. It is expected that, the foregoing changes will encourage foreign investment, boost forex liquidity in the Nigerian market; ensure ease in repatriation for foreign investors; and encourage transparency.
Footnotes
1. Please see other examples in the CBN Foreign Exchange
Manual, 2018
2. Please see some of the transactions ineligible for forex
here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.