World Bank urges CBN to rethink FX repatriation rebate

The World Bank has urged the Central Bank of Nigeria to reconsider its rebate scheme aimed at encouraging the repatriation and sale of export proceeds into the foreign exchange market.

The Bretton Woods institution said the scheme has created additional distortions in the country’s FX market.

In February 2022, the CBN introduced the ‘Race to $200 billion in FX Repatriation (RT200)’ programme, with the goal of repatriating $200 billion of non-oil export earnings over the next 3–5 years. Through the program, the CBN intends to reduce the country’s exposure to volatile sources of FX (mainly oil exports) and the main component of the program is a rebate scheme to “encourage repatriation and sale of export proceeds into the FX market”.

Exporters of finished and semi-finished goods can participate in this scheme by selling their repatriated export proceeds in the Investors and Exporters window to an authorised dealer bank on behalf of a willing buyer. In return, FX sellers receive an “incentive” of N65 for every $1.00 repatriated and sold at the I&E window to a third party and N35 for every $1.00 repatriated and sold at the I&E window for own use.

The World Bank said the goal of repatriating $200 billion however seemed ambitious, given that over the past decade, non-oil exports amounted to $49 billion.

“Good as the intentions of the scheme may be, it has introduced additional distortions in the FX market,” it said in its latest Nigeria Country Economic Memorandum. “In practice, this scheme has created an additional window (or sub-window) with a subsidised exchange rate, even though transactions are executed through the I&E window: the effective naira exchange rate for the FX seller is the subsisting I&E rate plus N65 or N35.”

It said the substantial parallel to the I&E rate premium (71 percent as of October 2022) and expected further depreciation of the I&E rate in a context of FX shortages may have created incentives for exporters to settle transactions with third parties outside of the I&E window at the parallel rate.

Based on anecdotal information, the parallel rate has become the prevailing rate in the willing-buyer-willing-seller market, but transactions are still recorded at the I&E rate for accounting purposes, according to the multilateral lender.

“This policy should be reconsidered. Similarly, the strategy of awaiting the onset of a planned new domestic crude-oil refinery in 2023 with the expectation that it will shave off a considerable amount of FX demand (petroleum product imports account for 30 percent of FX for imports) and help build the external reserves may also need to be re-assessed,” the World Bank said.

It said while the planned refinery would indeed help to reduce FX demand on the one hand, the supply of FX from crude oil exports will, on the other hand, be reduced, unless the refinery’s payments for its crude-oil purchases from the government are in foreign currency.