In case you have been out of the loop recently, you may have missed out on the saga involving the Central Bank of Nigeria (CBN), MTN, and a couple of banks. According to the CBN, MTN in collusion with banks “illegally” repatriated dividends worth just over $8bn between 2007 and 2015. The CBN says this is illegal because there were problems with its certificate for capital importation (CCI).
Apparently, there were discrepancies which the CBN did not give its final approval of, even though it gave an approval in principle. The discrepancies were that in its original CCI used to “import capital” in 2006, MTN had a different mix of debt to equity compared to its financial statement in 2007. The change was that it converted non-interest debt to preferential shares. That in itself is not illegal. What, according to the CBN, is illegal, is that it then went on to repatriate over $8bn based on the new structure without its approval.
Now I am not a lawyer, so I am not going to make any claims on the legality of converting debt to preference shares. It seems like a pretty standard legal exercise but what do I know. There are certainly thousands of reasons why a company would change its shareholding structure and certainly those things are not cast in stone. Of course, MTN has since come out to say it did nothing illegal and the corresponding banks who ran the transactions have also come out to say they did nothing illegal. Perhaps this is one for the courts to decide.
But as the popular saying goes, “do not lose sight of the forest while looking at the trees”. Translated as don’t lose sight of the bigger picture. What is the bigger picture here?
Foreign direct investment is one of the key components of economic growth. Investment of the type that MTN did is a virtually non-negotiable ingredient for any serious country that is looking to climb up the development ladder. These investments, besides just being businesses on their own, also in most cases serve as the basis for skills transfers from countries who know how to do things to countries who don’t. This is true from the United States to China to India and indeed Nigeria. These investments are however not charities. Investors gauge where to invest by considering the amount of money they have to put in, the returns on the investment, and the ability to get the returns of their investment back out again.
The getting-money-back-out-again is the part of the equation where CCIs come in. CCIs are supposed to serve as evidence that an investor brought capital in to do something, so that when it is time to leave it is easy to take the capital out again. Importantly, it is a purely administrative exercise and there are no limits on how much you can invest or how much you can take away as returns on your investment. As long as you pay all taxes due then there is no problem.
What is the story in MTNs case? It is not disputed that MTN brought in capital. It is not disputed that MTN built a mobile network. It is not disputed that MTN made money legally. It is not disputed that MTN paid taxes on the money it made legally. Therefore, it is not disputed that MTN owns the $8bn in question. Indeed, if MTN complies with the CBN request, the $8bn is still theirs.
However, the problem is that between 2015 and now the naira has tumbled dramatically. Indeed, if MTN was to “refund” the $8bn it would have to roll back the transaction at whatever exchange rate was used at the time. But if it tried to re-repatriate the naira equivalent it would have to do that at current exchange rates. What this means is it would face at least a $4bn loss from complying with the order, which the CBN would gain by the way.
When you look at the entire picture it seems like a circa $4bn penalty for what is essentially an administrative issue. An issue which MTN reported and dealt with long ago. In economics we call that expropriation by the state, a situation where the government finds a way to seize profits from foreign firms. Nigeria tends to rank high on the list of countries with a high risk of state expropriation so maybe we should not be surprised.
MTN is probably not going to leave Nigeria because of this. The matter will be settled somehow as these matters always are. The damage to the perception of Nigeria as an investment destination will however not be so easy to repair. It is very difficult to measure the potential investors who, because of this incident, will opt out of investing in Nigeria. And because it is difficult to measure, it is difficult to conceptualize. But the damage is still done either way.
*Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa. The opinions expressed in this article are the author’s and do not reflect the views of his employers.