VIII. TRADE AND PROJECT FINANCING BALANCE OF PAYMENTS Despite slightly higher production, oil exports, which account for over 95 percent of total export revenues, earned about USD 600 million less in 1993 than in the previous year due to a drop in the prices realized for Nigerian crude, from an average of USD 19.78 per barrel in 1992, to less than USD 18 per barrel in 1993. Moreover, although Nigeria achieved a trade surplus in goods and services, debt servicing obligations, (had they been paid), would have pushed the country's overall balance of payments into a substantial deficit. Instead, Nigeria increased arrears on payments to creditors to over USD 6 billion, and managed to end the year with only a small overall balance of payments deficit. Foreign reserves by the end of 1993 remained critically low, however, at around USD 700 million, providing cover for only one month's worth of imports. Nigeria's unsustainable external debt continues to cloud its balance of payments outlook and leaves the country with little in the way of resources to finance trade or developmental projects. According to official government statistics, which may in fact understate the problem, external debt totaled around USD 29 billion by the end of 1993, which was more than Nigeria's entire gross domestic product. Debt service due is projected to be USD 4 billion to USD 5 billion annually for the next several years. For 1994, lower earnings from the oil sector, (due to lower world market prices), the need to service its large external debt, and continued low foreign reserves will limit Nigeria's abilities to purchase goods and services from the United States and other foreign suppliers. OVERVIEW OF BANKING SECTOR As stated previously, Nigeria's banking sector, which was already under considerable strain in 1993, faces additional instability due to the Government's setting of deposit and lending rates market in 1994. In spite of this situation, and the fact that the U.S. Export-Import Bank is not extending funding to projects in Nigeria, the World Bank and African Development Bank represent possible finance options for U.S. business. FOREIGN EXCHANGE CONTROLS AFFECTING TRADING The first specific exchange control statute enacted in Nigeria was the Exchange Control Act of 1962, (ECA), two years after independence. The ECA generally prohibited Nigerians and incorporated and unincorporated associations from dealing in foreign currencies or engaging in a variety of offshore banking transactions without the consent of the Minister for Finance, who served as the basic regulatory authority under the ECA. The ECA prescribed penalties such as fines and imprisonment for offenders. However, staggering levels of capital flight from Nigeria during the oil boom era, (particularly during the early to mid-1970's), resulted in the subsequent imposition of considerably stiffer penalties. The Exchange Control Anti-Sabotage Decrees of 1977 and 1984, (ECASDS), were introduced in an attempt to staunch the flow of capital out of the country. These statutes substantially increased the penalties under the ECA for breaches of exchange control regulations. Nevertheless, following the drop in world oil prices and the need to adopt trade liberalization measures stipulated by international financial agencies such as the IMF and IFC as a precondition to continued access to foreign credit facilities, the Nigerian Government effectively ceased official intervention in determination of the Naira exchange rate and eased exchange control restrictions. The Foreign Commercial Domiciliary Accounts Decree, (FCDA) of 1985, permitted Nigerian citizens and associations to establish and operate accounts denominated in stipulated foreign currencies with local banks, virtually free from exchange control restrictions. The Second-tier Foreign Exchange Market Decree (SFEM Decree) of 1986 created two separate rates of exchange for the Nigerian Naira the previously existing official rate and a second-tier rate or parallel market rate . Both rates were later merged and the SFEM replaced by the Foreign Exchange Market (FEM). These developments, in combination with the creation of foreign currency exchange houses, (Bureaux de Change), in which foreign exchange could be freely bought and sold, (subject to availability), resulted in the Nigerian currency, the Naira, achieving a degree of convertibility. Under the FCDA and the SFEM Decrees, the Central Bank of Nigeria assumed enhanced responsibility, thus becoming an alternate regulatory authority in such matters with the Finance Ministry. Later decrees, such as the Banks and other Financial Institutions Decree, ("BOFID"), of 1991, and the Central Bank of Nigeria Decree, 1992, served to reinforce the authority of the CBN. Policy statements and circulars issued by the CBN are almost invariably treated as law, particularly by local bankers, all of whom are under the direct CBN control. The 1994 Nigerian Federal Budget marks a return to the restric- tive exchange control regime witnessed in Nigeria between 1962 and 1984 under the ECA and ECASDs. The exchange rate was set, and the country's foreign exchange market, characterized by foreign currency auctions, was replaced by a new system whereby banks are merely to channel demands of their customers, (fully backed by Naira deposits), to the CBN. The CBN administratively considers foreign exchange bids every two weeks and meets out a pro-rata allocation to applicants. Bureaux de Change may no longer sell foreign currency to their customers. Foreign currency domiciliary accounts are effectively cancelled, although current domiciliary account holders may use funds deposited in these accounts, but may not add to them. The policy shift, in combination with the CBN's current requirement that all foreign currency imported into Nigeria be automatically converted at the CBN, (at the official rate pegged by the Government), appears to have fully restored the earlier restrictive exchange control regime previously described. Upon importation of foreign currency into Nigeria for any purpose, the receiving bank is expected to immediately remit the imported currency to the CBN for conversion at the official rate. The CBN thereafter credits the importer's local account with Naira. In other words, funds brought within the Nigerian banking system can only be held in Naira. Exporters of goods and services from Nigeria are required to repatriate their foreign currency proceeds to Nigeria for conversion at the CBN since the concession previously afforded exporters to retain a portion of their export proceeds in offshore accounts has been specifically abolished. Importers of foreign exchange who have had their deposits converted to Naira at the CBN but wish to re-purchase foreign exchange for use in so-called eligible transactions must complete a Form, FC4A, and apply to the CBN through a licensed bank. The CBN has issued assurances that foreign exchange importers have an automatic right to re-purchase, that is, re-convert to hard currency, and that requests by such depositors will be accorded priority treatment. However, no details were provided, and the new Form FC4A was not available as of February, 1994. The CBN also prohibited the creation or operation of Bills for Collection/Open Account import transactions. Importation may only be conducted through Letters of Credit, except in situations in which the value of goods to be imported is USD 1,000 or less. Businesses which wish to obtain foreign exchange are required to apply with a Form 'M' (for importation of 'visibles' i.e. goods, machinery, etc.) or a Form 'A' (for 'invisibles' e.g. dividend remission, equipment lease rentals, travel allowances, etc.) Submission must be made through licensed banks to the CBN. As stated, the CBN considers bids every two weeks and effectively allocates on a prorated basis which importers are finding insufficient to open or fund letters of credit. Since the inception of the CBN's new allocation system, the supply of foreign exchange by the CBN has fallen far short of demand in Nigeria. Out of USD 1.16 billion requested at the initial allocation session, only USD 200 million was provided by the CBN and only USD 100 million was supplied in a subsequent session. Manufacturers in particular, have found it largely impossible to raise sufficient foreign exchange to fund letters of credit for the importation of raw materials, machinery, and essential operating equipment and spare and replacement parts, from a single allocation. It appears necessary to combine the foreign exchange derived from a number of allocations in order to cover a large letter of credit. The CBN has said that importers are entitled to combine separate allocations to fund their letters of credit and that reporting requirements would be relaxed in such situations to enable importers stay within exchange regulations. TYPES OF AVAILABLE EXPORT FINANCING AND INSURANCE The reintroduction of a stiff exchange control regime and the prohibition of other means of acquiring foreign exchange, such as through Bureaux de Change or through the parallel market, have created a bottleneck in the sourcing of foreign exchange for importation and other transactions. The negative effects of this policy are being felt in the form of spiralling inflation and a stifling of export incentives. The inability of the CBN to adequately satisfy demands for foreign exchange is expected to further reduce economic activity and growth, particularly in the manufacturing/importing sectors. The U.S. Export-Import Bank of the United States and its insurance affiliate, The Foreign Credit Insurance Association (FCIA), have financed/insured a number of projects in Nigeria in the past. However, in 1992 Ex-Im Bank adopted a more restrictive policy toward public and private sector projects in Nigeria. For more information call the U.S. Ex-Im Bank, (202)-566-8990. The U.S. Trade and Development Agency (TDA) located in Washington, D.C. offers two programs that can assist U.S. exporters. First, a foreign government can apply for grant assistance for planning studies of major public sector projects for which there are plans to allocate substantial resources for foreign goods and services. Second, TDA also offers direct financing to U.S. companies for feasibility studies connected with potential investments. Such feasibility studies may be partially financed (up to 50%) by TDA to provide assistance to potential U.S. investors in investigating and developing prospective investment projects. Under current policy, TDA financing is in the form of a four-year interest-free loan, secured by the potential investor's promissory note. For information on the availability TDA programs in connection with Nigeria, call (703)-873-4357. The U.S. Overseas Private Investment Corporation (OPIC) offers investment insurance and loan guaranty coverage. For further information contact OPIC at 202-457-7052. The Multilateral Investment Guarantee Agency (MIGA) of the World Bank offers similar coverage of non-commercial risks for all MIGA members. For more information, call (202) 473-5106. World Bank lending is geared mostly toward large sectorial projects rather than exports. Loan approvals for Nigeria during 1992 included an Urban Transport Project, A Railways Project, Oso Condensate, and the Lagos Drainage and Sanitation Project. Proposed project financing by the World Bank and its affiliate, the International Development Agency, for 1993-1994 in Nigeria is approximately USD 1.4 billion. For further information contact the World Bank in Washington at (202) 477-1234. The International Finance Company (IFC) is a member of the World Bank Group that fosters private enterprise by financing private sector projects. IFC financed investments in Nigeria include food, agribusiness, automobiles and accessories, textiles, and general manufacturing. The African Development Bank (AFDB) mostly finances agricultural projects. In the transportation sector, loans have been largely focused on road construction and maintenance. The U.S. Government Liaison official for the African Development Bank, located in Abidjan, Cote d'Ivoire, is the US&FCS Senior Commercial Officer, at the U.S. Embassy, Abidjan. Tel: (225) 210-979 or 214-672; Fax: (225) 223-259. The British Export Credit Guarantees Department offers short- term, 180 days, debt-financing coverage for Nigeria and is available to U.S. firms with manufacturing affiliates in the U.K. The Africa Growth Fund, a privately owned, funded, and managed investment company, has expanded operations in Nigeria and West Africa. The fund invests in private businesses to assist in economic development. The fund is managed by Equator Investment Services, Ltd., an affiliate of Equator Bank, in Hartford, Connecticut. Tel: (203) 249-7777, or Fax: (203) 247-8429. Nigerian internal financing is through banks, insurance companies, government and individual sources. However, limited availability of capital and high interest rates remain serious drawbacks. U.S. firms are advised that fraudulent business practices involving bogus financial documents, non-existent banks, etc., are common. Independent verification of the legitimacy of transactions is recommended and U.S. firms should consult with their international banker for document verification. In addition, exporters should contact their local U.S. Department of Commerce District Office and request information on the World Trade Data Report and the Agent Distributor Service. U.S. Affiliated Nigerian Banks: Nigeria International Bank Ltd. 1 Idowu Taylor Street Victoria Island, Lagos PMB 12028, Lagos Tel: (234)-(01)-610704 U.S. Affiliate: Citibank Nigerian American Merchant Bank Ltd. 10/12 McCarthy Street Lagos Tel: (234) (01) 263-7568 U.S. Affiliate: First National Bank of Boston