As Nigeria confronts intricate web of foreign exchange (FX) forward obligations, the pressing need to address these outstanding liabilities has become increasingly apparent. In September last year, the Central Bank of Nigeria (CBN) Governor Olayemi Cardoso had signaled a strong commitment to resolving the backlog of FX obligations inherited from the previous administration. Analysts said resolving FX Forward obligations will translate to significant growth in businesses and stability of the economy. The CBN has however, said all valid FX have been cleared in line with its promises.
The current leadership of the Central Bank of Nigeria (CBN) led by Olayemi Cardoso has severally disclosed reasons why it prioritised the settlement of over $7 billion FX backlog owed to businesses.
At the recently held BusinessDay CEO Forum 2024 with theme: “Leadership In Tough Economic Times” he said the settlement of the FX backlog was meant to build investors confidence in the domestic economy and create lasting credibility for the country.
Speaking during the Fireside discussion at the event, the CBN boss said he was advised against making the backlog clearance a priority at the inception of his tenure, because of the impact it will have on the country’s dollar position.
He said: “People thought, there was no need to prioritise the forex backlog clearance. But they failed to realise that the country was in a state of crisis, and loss of confidence. Even without that, it is important, that you hold high your integrity. As a bank, your yes, must be yes. That is a big major step in building credibility. It is very tempting to push that aside, but ultimately, I was convinced that if we did not do that at that time, we would pay the price as a country.”
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Understanding FX Forward landscape
FX forwards are financial derivative contracts where two parties agree to exchange a specified amount of one currency for another at a predetermined rate on a future date.
This contract, unlike immediate spot transactions, provides a mechanism for hedging against currency risk or speculating on currency movements. For the CBN, FX forwards are instrumental in managing foreign exchange reserves and influencing exchange rates. Yet, when these contracts remain unsettled, they become liabilities that can impact the broader economic landscape significantly.
In September 2023, Cardoso announced a startling figure: an inherited backlog of $7 billion in FX obligations. Following a forensic audit by Deloitte, which exposed $2.4 billion of these obligations as invalid due to factors such as invalid import documents and non-existent entities, the CBN was left with a reduced yet substantial outstanding amount of $2.2 billion.
However, as the country now stands at the cusp of a new economic phase, the resolution of these debts remains critical to restoring investor confidence and stabilizing the economy.
The CBN has however announced that all valid foreign exchange backlogs of s$7 billion have now been settled, fulfilling a key pledge of Cardosoo.
In a statement, the apex bank’s Acting Director, Corporate Communications, Mrs Hakama Sidi Ali, in Abuja confirmed that independent auditors from Deloitte Consulting meticulously assessed these transactions, ensuring that only legitimate claims were honoured.
She said that the CBN recently concluded the payment of $1.5 billion to settle obligations to bank customers, effectively settling the residual balance of the FX backlog.
FX investigations impact on economy
The investigation into these FX forwards has been ongoing for over six months with no resolution in sight. This delay has intensified concerns among affected businesses, including corporates and SMEs, which face unresolved FX bids. These companies have utilized bank lines to open Letters of Credit, paid import duties, and settled suppliers through correspondent banks. The prolonged investigation is causing increasing anxiety among these stakeholders.
The unresolved nature of these forwards poses immediate financial risks for companies, forcing them to seek less favorable spot market rates for their currency needs. If these forwards were intended to hedge against adverse currency movements, their non-settlement exposes businesses to higher costs and potential losses from fluctuating exchange rates.
The broader economic implications are severe. Analysts warn that unresolved forwards could result in financial, operational, reputational, and regulatory challenges, potentially leading to losses estimated at N2.4 trillion over the next few years. This could strain federal government revenues and negatively impact profits.
In emailed report to investors, Investment research Associate at Comercio Partners, Ifeanyi Uba, said the clearance of the backlog aligns with the CBN’s strategy to stabilize the exchange rate, mitigate imported inflation, and enhance confidence in the banking system and economy.
He said: “Cardoso underscored the significance of this action in restoring credibility and confidence in Nigeria’s economy, signaling a positive stride towards a more resilient and stable financial landscape, thereby fostering confidence among investors and businesses”.
FX reforms- how it started
In mid-June last year, two weeks into the new administration of President Bola Tinubu, the Central Bank of Nigeria (CBN) announced collapse of all exchange rates into the Investors and Exporters (I&E) window, abolishing the prevalent multiple exchange rates regime.
Cardoso promised that the forex market liberalisation policy implementation will promote free market entry and exit, transparency, boost dollar liquidity and create vibrancy within the forex market. The move he predicted, will attract Foreign Portfolio Investments (FPIs) and Foreign Direct Investment (FDIs) inflows to the economy.
The operational changes to the foreign exchange market also included the re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window- now the official market.
The CBN has taken strategic steps to tame exchange rate volatility to achieve sustainable recovery for the naira.
Stakeholders’ calls for action
The Organised Private Sector (OPS) has been vocal in its demands for the CBN to resolve valid FX forwards without delay. Major organizations including the Manufacturers Association of Nigeria (MAN), Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), and the Nigeria Employers’ Consultative Association (NECA) have urged the CBN to address outstanding forwards to avert further economic damage.
Although some stakeholders argued that involving the Economic and Financial Crimes Commission (EFCC) may be unnecessary for what is fundamentally a financial issue, there is a clear consensus on the need for the apex bank to act swiftly in resolving the matter. The focus should be on direct engagement with banks to resolve these cases efficiently.
Way forward
Michael Obi, FX dealer based in Lagos, said that to ease pressure on the naira and stabilize the FX market, the CBN recently announced plans to sell dollars through a Retail Dutch Auction System on August 7.
He said authorized dealer banks have been directed to submit comprehensive lists of outstanding FX demands from their clients by Tuesday, August 6th. This information will include details such as names, addresses, contact information, and the type of transaction.
This measure aims to address the growing foreign exchange demand, exacerbated by seasonal factors and business import needs. The success of this initiative will depend significantly on the CBN’s ability to resolve existing FX forward obligations in a timely and transparent manner.
As the naira faces significant depreciation, addressing the FX forward backlog is essential. The CBN’s proactive approach in settling these obligations, coupled with efforts to stabilize the currency, will be pivotal in restoring economic stability and investor confidence. Efficiently resolving these pending FX forwards is crucial for Nigeria’s economic recovery and long-term resilience.
At FirstBank’s corporate customer engagement held in Lagos, its Head of Treasury Sales, Mrs. Adeola Abioye, explained that the CBN is taking a back seat in supplying forex to the economy and that has affected access to forex at the official window.
Abioye said tight forex liquidity will persist as long as Nigeria’s ability to attract foreign capital continues to nosedive, school fees payment for Nigerian students studying abroad continues to rise, and medical tourism persists.
She advised businesses that regularly need forex to be more deliberate and focused on non-oil export transactions that will earn them forex to fund their own operations.
“CBN Forex supply has gone down from average of $1.2 billion to less than $100 million per month, at present. Unfortunately, the major contributors to the Importers and Exporters (I&E) window have been the exporters. Forex proceeds from exports account for about 15 per cent of the total forex inflows,” she said at the event held late last year.
“And if the whole official market is now relying on export proceeds, then you can understand why the market liquidity has been so tight for so long. It is not looking like there is going to be any major shift in that for now.”
Abioye recommended that businesses look into non-oil export. “We have seen a surge in the non-oil export, but the concentration has been on the agriculture. I think that businesses should be more deliberate and intentional about focusing more on non-oil export,” she said.
“The body language is that we are not going to be seeing as much supplies from monetary authority as we were seeing in the past. The generation of forex supply will then lie in the market because we are not likely to be seeing the CBN playing the major role that they played in the past in providing forex,” she stated.
