The Central Bank of Nigeria’s (CBN) three-year battle with its foreign exchange backlog seems nearing its endgame, with loans and inflows offering a glimmer of hope. Yet, while the temptation to simply “throw money at the problem” using these incoming dollars might be strong, a more nuanced approach is needed.
Bola Onadele. Koko, CEO of FMDQ Group, in a recent interview with BusinessDay, said the CBN should explore creative ways to clear the FX backlog. He mentioned using the Brady bonds method.
“I hear of inflows of two billion, three billion coming in; you shouldn’t even use those to clear the backlog. You have to think of how to leverage that. How about using $5 billion that you have to buy a 30-year zero coupon treasury that takes you to about $15 billion? Use that investment ($15 billion) collateral to borrow $15 billion today. You have to look for creative ways to clear the forwards,” he said.
The CBN has sought various avenues to address the issue, including seeking loans from international institutions like Afreximbank and the World Bank and some other sub-lenders including VITOL, Guvnor, one of the world’s largest energy trading houses by turnover, Sahara Energy Group, Oando and the United Bank for Africa which chipped in $100 million.
As of August last year, the FX backlog was estimated to be between $7 and $10 billion.
In November 2023, the CBN said it had set up FX frameworks to address the FX issues and has cleared the backlog with 31 banks. After this, there were reports of it clearing some of the backlogs.
Nigeria’s external reserves increased on January 3 when it received part of the $3.3 billion Afreximbank loan, which helped boost its reserves.
Wale Edun, minister of finance and coordinating minister of the economy, revealed this week that that the central bank puts the current backlog at about $5 billion and is seeking as much as $1.5 billion from the World Bank to ease dollar shortages and may tap the Eurobond market later in the year if rates move sufficiently lower.
Even if all of the World Bank support was used to settle the backlog, there would still be an outstanding $3.5 billion.
“We need to clear the backlog; it has been there for three years; once it’s cleared, even international banks will have the confidence to deal with Nigeria,” Ayodele Akinwunmi, the relationship manager of FSDH Merchant Bank, said.
“There was a time the government was talking about selling crude oil forwards to enable them prioritise the backlog; that’s part of the ways to do it,” he said, “Whatever solution that can ensure the backlog is cleared is welcomed, but clearing it should be the priority.”