Fund Manager Considerations When Investing in Nigeria

Published: Dec 7, 2023
By: Matei Odobescu; Kobi Assaraf; Elana Margulies-Snyderman; Kimesh Vora
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Investing and trading in Nigeria comes with many complexities, hence there are a handful of considerations fund managers need to be aware of when repatriating the Nigerian currency, the Nigerian Naira (NGN), into the U.S. Dollar (USD). Due to constraints imposed by Nigeria’s government and Central Bank clamping down on foreign access to the USD because of the NGN’s low liquidity, fund managers who seek access to it must go through unofficial channels, including the parallel markets and dual-listed stock mechanisms, to convert and subsequently repatriate the NGN since investors are not able to exchange the NGN to the USD despite the fact that the Central Bank of Nigeria has published an official NGN/USD rate. ¹

To highlight the number of fund managers who have gone through the unofficial channels to repatriate the NGN, as of September 26, 2023, Nigeria's Central Bank Governor Olayemi Cardoso estimates that the Central Bank’s backlog of unsettled foreign currency exchange obligations was $7 billion. ²

Fund managers leveraging dual-listed stock mechanisms have been highly effective since they have been able to trade stocks listed on both the Nigerian Exchange Group (NEG) and the London Stock Exchange (LSE) and ultimately repatriate cash back to the United States.

For example, a fund manager could purchase, using NGN, Airtel Africa or Seplat Energy shares traded on the NEG and sell the same shares on the LSE, obtaining proceeds denominated in British Pound Sterling (GBP). Further, they could have bought one share in each, Airtel Africa and Seplat Energy, for 1,635 NGN and 1,100 NGN respectively for a total of $2,735 NGN and later sold the same shares on the LSE receiving 1.118 GBP and 1.05 GBP respectively for a total of $2.168 GBP. This would result in an implied exchange rate of 1,044.05 USD/NGN. At the same time, the official Central Bank of Nigeria rate was 2.26 times the implied rate, while the parallel rate (unofficial) was approximately 1.37 times the implied rate.

EisnerAmper has observed some fund managers using the implied rate to convert Nigerian investments into USD in their financial statements while others are using the official rate. Neither FASB nor other regulators have addressed the Nigeria issue specifically, and therefore firms have interpreted and applied the guidance in ASC 830 differently. The effects of using the implied rate versus the official rate can have material impacts on the financial statements of issuers and fund managers who face this hurdle are encouraged to consult their auditors.

Since Nigeria's President Bola Tinubu has assumed office this year, he has been working on reform to solve the USD liquidity issue in the foreign exchange markets, as well as unifying the system of multiple exchange rates, by floating the NGN exchange rate. While today investors still face challenges repatriating currency out of Nigeria, the reform started by President Tinubu and Nigeria’s Central Bank could improve the inflow, as well as outflow, of investments to Nigeria.

Given the complexities of trading in Nigeria, foreign investors who are interested should be mindful of these intricacies and are advised to consult with subject matter experts or auditors.

¹https://www.cbn.gov.ng/rates/exchratebycurrency.asp
²https://www.reuters.com/business/finance/nigerias-central-bank-governor-cardoso-pledges-clear-7-billion-forex-backlog-2023-09-26/