The Nigerian Economy: 2016 Third Quarter Year Review – Budget and Currency Exchange Rates

The 2016 Nigerian budget’s expectation of earnings of N820 Billion ($4 Billion) from oil exports in 2016 was based on a production assumption of 2.2 million b/d and a benchmark price of $38/barrel. The N 6.07 trillion ($30.1 Billion) budget proposal for 2016 was predicated on the said benchmark, at the then prevailing official currency exchange rate of N197 – $ 1.

Global prices of crude oil have risen to circa $ 50/barrel from an all-time low in January 2016 of $ 27.10/barrel for Brent crude (the bench mark price for Nigerian crude) and well above budgetary benchmark of $ 38/barrel and thus potentially increasing revenue from oil exports, well above the aforesaid budgetary estimate.

However, the inability of crude oil production to meet daily production targets for prolonged periods in 2016, due to shut downs arising from pipeline vandalism and sabotage of oil infrastructure through militant activities has resulted in an extreme drop in oil revenue earnings. In consequence of this, the Central Bank of Nigeria (CBN) decided to review its longstanding fixed exchange rate regime in order to reduce the severe pressures on Nigeria’s external reserves, alleviate the foreign exchange supply crisis and address the considerable gap between the official and the unofficial (real market) exchange rate.

The CBN on May 24 2016 announced a flexible exchange rate regime aimed at making foreign currencies more accessible. With this action, the CBN nullified the official exchange rate regime of N197/dollar. By this development, the interbank foreign exchange market, which had been dormant for some time, was revitalised on an unrestricted exchange rate basis, while the Bureaux de Change, (BDC), would continue their operations, thus creating multiple exchange windows. Although the CBN would not permit the BDCs to purchase dollars from the interbank market. The markets opened in June 2016 with the flexible official rate at $1 – N280 and the unofficial rate at $1 – N340.

The technical details of the new system are as follows:
A. Market moving to single market through inter-bank via a Reuters / FMDQ order matching system with 10 primary dealers (two-way quote mechanism) and other secondary dealers.


NB. FMDQ -The Financial Markets Dealers Association, an association of the treasurers of banks and discount houses in Nigeria, commenced the project to create a self-regulatory organisation (SRO) in 2009 with the primary purpose of deepening the inter-bank OTC market trading in various securities and products. Thereafter the association promoted the formation of FMDQ OTC PLC. The company was licensed by the Securities and Exchange Commission, SEC, as a self- regulatory organisation, SRO, to organise and provide oversight on the Over-the-Counter, OTC, market in the Nigerian capital market in November 2012)

Primary dealers (authorised dealers i.e. the licensed banks) to operate the inter-bank market. CBN may intervene from time to time.

B. Primary dealers (authorised dealers i.e. the licensed banks) to operate the inter-bank market. CBN may intervene from time to time.

C. Proceeds of FDI (Foreign Direct Investment) shall be purchased by authorised dealers at the daily inter-bank rates.

D. Non-oil exporters are allowed unfettered access to export proceeds via the interbank rates

E. 41 items formerly constrained by CBN will still not be eligible for trade on interbank

F. To enhance liquidity, CBN may offer long dated 6 – 12 months’ forwards to authorised dealers. Forwards must be traded backed with no authorised spreads


G. A new product was introduced, namely the authorised NGN futures on the FMDQ OTC – which will allow non-standardised amounts, no fixed dates or tenors allowing businesses to hedge. Futures will be NGN settled.

It was expected that this would result in a drop and eventually herald the demise of the unofficial (real market) rate as anyone and everyone would be able to buy dollars at any bank or with authorised dealers at a market determined price.

Some volatility was anticipated but It was anticipated that over time, investors and businesses who were reluctant to import dollars into Nigeria would be encouraged to bring in their forex at a price they believe is market determined. That this would enhance liquidity over time.

The volatility did however exceed expectations as the rates fell sharply in the wake of the announcement between June – September 2016. There remains an appreciable gap between the official and the floating (official) rates and the unofficial rates. This has been a major concern for Nigerians and foreign investors alike and confidence in the Naira has been severely dented with the official flexible rate falling sharply to its currently prevailing rate at $1 – N315.25 and the unofficial rate at $1 – N468 on 14/10/2016.

However, it must be said that in many countries where a full float was launched, the value of the home country’s currency did plummet woefully before it found its level. However, the rates between the inter-bank market and the parallel market did narrow and although, this has not yet happened appreciably in Nigeria, economic experts expect that it will also replicate in Nigeria.

The CBN Governor has not dwelt on the controls currently in place such as limits to withdrawals of dollars from your bank domiciliary accounts or spending limits when abroad. However, it is expected that the severe limits will be removed in due time as the market becomes more liquid.

Nigerian Port Concessioning, 10 years of Port Reforms

In 2016, the Nigerian Ports Authority (NPA) took stock of the 10th anniversary of Port reforms in Nigeria amid assurances by the Minister of Transport, Mr. Rotimi Amaechi, that a comprehensive audit of the concessionaires’ operations would soon be carried out to know whether to review their agreement with NPA, especially those whose tenure expires this year.

The Nigerian economy accounts for about 70% of all seaborne trade in the West African sub-region and yet, the system of seaports, established in 1921, had not undergone any systematic process of re-development until the concession programme of port reforms, which commenced in 2000 and was concluded in 2006.

The concessioning programme with concession terms ranging from 10-25 years brought into existence the current system of private port operators in Nigeria, namely Lagos Port with 7 concessionaires, Lagos Tin Can Island Port with 4 concessionaires, Rivers Port (Port Harcourt) with 2 concessionaires, Delta Port Complex with 5 concessionaires, Onne Ports (Federal Lighter Terminal & Federal Ocean Terminal) with 4 concessionaires, Calabar Port with 3 concessionaires.

The concession system has resulted in compliance with international standards, particularly the International Ship and Port Facility Security Code (ISPS Code). Security compliance bench-marking to international regulations and elimination of a multiplicity of poorly coordinated federal law enforcement and security operatives, has also served to curb the incursions of unauthorised personnel within the port; along with the several vices long associated with the Nigerian ports, namely, pilferage, bribery and unscrupulous labour and stevedoring practices (including excessive charging). Additionally, plant and equipment inefficiencies and inadequacies have been minimized.

Significant gains have been made as a result of the concessioning such as: shortened turn-around time for ships; significant reduction of costs, seaport congestion, demurrage, overtime cargo and complaints of untraceable or missing cargoes; the rehabilitation/replacement of cargo-handling plants and equipment owned by the Nigerian Ports Authority (NPA) which were hitherto mostly unserviceable.

Nevertheless, it hasn’t been all smooth sailing, with concessionaires, who spoke under the aegis of the Seaport Terminal Operators Association of Nigeria (STOAN) in commemoration of 8 years of port reforms in 2014, cited ills affecting the effective and efficient running of the nation’s seaports to include inadequate power supply and incessant removal of management of government agencies. Others are arbitrary arrest of vessels at berth and attendant consequences, friction among maritime statutory agencies due to overlapping functions and lack of national carrier capacity for the United Nation Conference on Trade and Development (UNCTAD) 40:40:20 liner code.

STOAN have also recently cited, further challenges in need of attention, namely, inadequate provision of pilotage facilities, which reduces berth occupancy and utility rate; irregular sweeping of the Harbour bed, thus reducing draft and endangering vessels berthing; insecurity of vessels at the anchorage and water front of the Harbours and inconsistent cargo reception and release processes in the terminal together with associated delays.

Infrastructure Investment and the Diversification of the Nigerian Economy in 2016

Firm announced as Legal Advisors to Rendeavour Lagos Project

F.O. Akinrele & Co has been appointed by Rendeavour, Africa’s leading urban developer, to provide comprehensive legal structuring and infrastructure advice to the Rendeavour Lagos Project.

The Rendeavour Lagos Project is a major infrastructural undertaking in Lagos State and falling within a core practice area of the firm. The Rendeavour Lagos Project involves a landmark mixed use land development scheme on 200 hectares of land in the north-west quadrant of the Lekki Free Trade Zone (“LFTZ”) in Lagos State, Nigeria. This is being executed via a Public-Private Partnership (“PPP”) joint venture with the Lagos State Government (“LASG”).

F.O. Akinrele & Co’s advisory work is multifaceted and includes negotiation of land rights and title; generation and evaluation of interrelated project documentation and regulation, structuring of investment vehicles including special purpose vehicles (SPVs), joint ventures (JVs) and public private partnerships (PPPs).

The Nigerian Petroleum Sector 2016 Third Quarter Year Review

In our 2016 third quarter year review, we examine specific challenges confronting the Nigerian oil and gas sector as it continues to be affected by global externalities in 2016.

This year, the Nigerian petroleum sector continued to confront the downturn in global crude oil prices since the third quarter of 2014. The resultant slowdown in upstream exploration funding and investment is currently having an impact on oil well exploration and developmental programs. Equally, the power sector has had to confront interrelated challenges mostly emanating from supply shortages and gas pricing, the preferred fuel for power.

As NNPC has undergone much-welcomed restructuring in 2016 and Nigeria, in its capacity as an OPEC member continues to engage with fellow OPEC members in addressing global crude oil pricing; industry experts predict that funding and investment in the Nigerian petroleum sector will be positively influenced in the medium to long term if also accompanied by regulatory certainty and reform.

However, the short-term key existential and overriding challenge is militant activity. Since February 2016, midstream infrastructure facilities have come under incessant attack and vandalism by the new militants in the Niger Delta, triggering force majeure on production streams, bringing Nigeria’s production down to 1.2m-1.6m barrels per day for prolonged periods from the 2016 budget production estimate of 2.2m barrels per day and reducing the crude oil feed stock to local refineries.

The former government (2011-2015) had despite the news of continued pipeline vandalism, engaged in a militant amnesty programme substantially reducing the disruptions to industry facilities and enabling production to go back up to previous peaks of approximately 2.5 million barrels per day. Nevertheless, the gains of the amnesty were undermined by the revelation in 2013 that crude oil theft was costing Nigeria between 150,000-400,000 barrels per day.

The present government now seeks to re-evaluate the militant amnesty programme and address key Niger Delta security and environmental remediation issues through the establishment of a Joint (Army-Navy-Airforce) Task Force and the inauguration of the $1 billion Ogoni fund in February 2016 for the environmental restoration of Ogoni lands. The NNPC is also strengthening its collaborations with the Nigeria Security and Civil Defence Corps (NSCDC) to better protect its oil installations/pipelines in the country. In NNPC’s monthly financial and operations reports since September 2015, it has prioritised pipeline security reforms that would ensure reduction in crude oil theft as well as address the loss of other petroleum products.

To date, the NNPC continues to strive to fulfil the mission statement in its monthly report for September 2015 that “A comprehensive reform of the pipeline security situation will unlock several industry upsides, including improved upstream oil production due to reduced pipeline disruptions, improved refinery utilisation due to increased crude oil feed from restored pipelines, and reduction of crude/product losses”.