Nigeria's forex crisis shows that legal incentives are insufficient for investors

As a consequence of the COVID-19 lockdowns and the global fall in oil prices, the Nigerian naira dropped by at least 30% in value in the last financial year, compared to about 200% in the past decade. As the naira continues to crash in value against the dollar, investor confidence in the Nigerian economy continues to dwindle. A ripple effect of this crash and the reduction in foreign investments is that capital repatriation has become incredibly difficult for foreign investors already domiciled and operational in the country.

Recently, there have been reports of an acute dollar shortage and investors queueing up at the Central Bank of Nigeria (CBN) trying to transfer funds out of the country. This has crippled and reduced the operational capacities of some businesses including large scale projects like the Azure power plant project.

This problem has somewhat forced investors to buy local unit shares in lieu of their payouts. While this may be considered negligible at the instance of the investor and their profits, the same cannot be said in respect of loan capital repatriations. This issue brings to fore a problem in Nigeria's drive toward improving the ease of doing business, and exposes some flaws in the system beyond the legal aspects of it. 

Legal Guarantee of Repatriation

Nigeria's turbulent history with expropriations and nationalization of foreign-owned companies was corrected by the liberalization policy after 1986. The emerging framework thrives on the development of agencies such as the National Office for Technology Acquisition and Promotion, established in 1979, and the Nigerian Investment Promotion Commission (NIPC), established later in 2004.

More importantly, legal guarantees and assurances were made to foreign investors in these enabling laws for these institutions, and this includes the free, unconditional repatriation of capital and profit. The NIPC Act makes provisions for the unconditional transferability of funds provided the capital was imported through authorized dealers and a certificate of capital importation was validly issued.

For years since the NIPC Act was adopted, this has been a legal basis for attracting investors to do business in Nigeria, but evidence from previous events of dollar shortages has shown that it is now insufficient. Lawyers and consultants have had to creatively work around this problem by advising the use of large banks, mostly international, as their bankers, due to their relationship with the CBN.

Beyond the legal aspects of foreign participation, economic difficulties have in times past forced down the hands of investors as they have either resorted to parallel markets or outrageous bank rates for repatriation at a loss. 

Economic Policies must Match Legal Guarantees to Convince Investors

As the forex crisis deepened, the CBN introduced half-hearted attempts to guard the naira, including restricting access to dollars in individual accounts of private citizens and firms. Aside from the fact that this equally stifles business in the country, it did little to nothing to cushion the effects of the dollar shortage and improve investor confidence.

There was also the subsequent release of $10,000 to over 5,000 bureau de change licensees in Nigeria but that also had little effect due to the magnitude of the problem.

It thus becomes clear that if the law would mean anything to investors, the economics must equally make sense. For time-sensitive investments and businesses that rely on foreign loans, waiting up in queues for currency exchange is a disincentive. 

Let Currencies Trade Freely

These facts point to a need for a wholesome approach to the problem and the CBN appears to be in a fix given that COVID-19 lockdowns still ravage and oil prices are yet to fully pick up. Economists advise that a solution to the recurring forex crisis would be to allow the dollar trade freely. 

This also formed part of the International Monetary Fund recommendation in its 2019 report on Nigeria. While restrictions may have been introduced to guard the naira in the global market, these consequences are pointers to its inadequacy. 

Nigeria must now look beyond legal assurances to wholesome economic policies and practices to strengthen their position on improving the ease of doing business. The removal of certain restrictions on forex trade may be a good start and as economies start to rev up, investors may once again find confidence in doing business here.

This article was first published on City Press on 6 February 2021.