The outstanding foreign exchange (FX) forwards, valued at $2.2 billion are likely to be settled if more information is provided and stakeholder engagement is initiated, according to analysts.
Olayemi Cardoso governor of the Central Bank of Nigeria (CBN), early this year explained that the leadership of the Central Bank inherited a total of $7 billion FX backlog from the former administration which was investigated to ascertain validity.
He said that the CBN had settled verified FX requests which amounted to $2.3 billion but will not pay off $2.4 billion he declared as invalid FX backlog claims.
His words, “As we went along repaying the FX backlog, we had reasons to believe that we needed to take a harder look at the FX obligations, and we contracted Deloitte management consultants to do a forensic of all these obligations and tell us what was valid and what was not.
“We discovered that of the $7 billion FX backlog, about $2.4 billion were invalid based on invalid import documents, non-existent entities, beneficiaries who had asked for FX and got more than they asked for, and some who didn’t ask for any but got.
All of these amounted to about $2.4 billion invalid FX claims.”
The total outstanding unsettled FX forwards remained at $2.2 billion. The governor had noted that the Bank had written to authorised dealers to explain the disparities identified.
Cardoso said the bank had contracted the Economic and Financial Crimes Commission (EFCC) to investigate suspicious transactions and prosecute individuals and entities with fraudulent entries.
More than six months after contracting the EFCC the investigation remains incomplete, causing concern among affected companies whose legitimate foreign exchange bids have been stuck.
These companies, predominantly corporates and Small and Medium Enterprises (SMEs), have expressed frustration over the prolonged investigation. Many have utilised bank-confirmed lines to open Letters of Credit (LCs), paid import duties, and received their goods, while their suppliers were primarily settled by their banks’ correspondent banks.
Looking at the implementation of this on the economy, Alatise Yusuf, chief investment officer, Cowry Asset Management, said “If it crystallises and we fail to pay. It will damage our credit reputation in the financial circles. And more so, our credit ratings and eventually the downgrade of financial instruments, both existing and potential ones.”
Muda Yusuf, CEO of the Promotion of Private Enterprise, stated that the Central Bank has claimed to have settled all obligations related to the FX backlog. According to Yusuf, the Central Bank, in collaboration with the EFCC, conducted an investigation and cleared all verified obligations.
Regarding the unsettled cases, Yusuf suggested that there might be underlying issues. He recommended that the CBN and the EFCC should engage with those whose cases have not been verified, allowing them the opportunity to present their cases. If there are issues, the individuals should be invited to explain. If they cannot provide satisfactory explanations, their claims can then be classified as invalid. Yusuf emphasised the importance of providing this opportunity for those affected to defend their cases.
Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, has confirmed that the CBN has successfully settled the majority of verified claims.
Speaking on the outstanding FX forwards, Olubunmi noted that the CBN is actively seeking additional information to address the remaining outstanding claims.
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“The CBN has stated that it has settled all the verified claims,” said Olubunmi. “From what we have gathered, the CBN has been asking for more information, and there is a likelihood that the outstanding ones will be settled soon. It appears to be a matter of oversight and omission.”
According to Olubunmi, the amount yet to be settled is relatively minor compared to the initial volume of claims, suggesting that the CBN is making significant progress in resolving these issues.
As the transactions that occurred between 2022 and 2023 remain unsettled by the CBN, analysts are increasingly concerned that these unresolved forwards could undermine investor confidence in an already struggling economy, with significant implications.
They admitted that failure to honour genuine forwards could have major repercussions for companies, impacting their financial, operational, reputational, and regulatory aspects. Unsettled forwards could lead to immediate financial losses, forcing companies to enter the spot market at potentially unfavourable rates to meet their currency needs.
According to the analysts, if a forward contract was intended to hedge against adverse currency movements, non-settlement could expose the company to currency risk, resulting in increased costs if exchange rates move unfavourably, as is currently the case in the country. Counterparties may also incur losses, potentially leading to legal claims and demands for financial compensation, disrupting the company’s cash flow management due to unmet expected receipts or payments in foreign currencies.
Analysts emphasise that repeated failures to honour FX forwards may indicate weaknesses in internal controls and risk management practices, necessitating a review and overhaul of these systems. Reports suggest that the non-settlement of forwards could cause companies to lose approximately N2.4 trillion, impacting their profits over the next two to three years and threatening federal government income.
There are growing concerns among Nigerian corporates and SMEs that the non-settlement could strain the fragile FX market, currently being repositioned by the apex bank, potentially driving exchange rates to around N3,000.
A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a customisable hedging tool.
The Organized Private Sector (OPS) has raised concerns that the ongoing delay in settling companies’ outstanding liabilities could result in losses of approximately N2.4 trillion. This situation has significant implications for both the companies and the broader economy.
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The OPS warns that companies’ profits might be affected for the next two to three years, federal government revenue could decrease, and the Naira may face increased pressure. Additionally, banks could experience losses as Small and Medium Enterprises and corporate clients might struggle to service their confirmation lines, potentially jeopardising over one million jobs.
Organizations within the OPS, such as the Manufacturers Association of Nigeria (MAN), Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Nigeria Employers’ Consultative Association (NECA), Nigeria Association of Small and Medium Enterprises (NASME), and the Nigerian Association of Small Scale Industrialists (NASSI), have specifically called on the Central Bank of Nigeria (CBN) to settle all valid outstanding forex forwards for companies in the productive sector.
However, the apex bank planned to sell dollars in a retail auction this week. The action is aimed at easing the mounting pressure on the local currency and stabilising the foreign exchange market.
According to a circular issued by the CBN in Abuja, the upcoming sale is in response to the “growing unmet foreign exchange demand,” which has exacerbated pressure on the naira’s exchange rate. The CBN has called on authorized dealer banks to compile and submit a list of all outstanding FX demands by end users.
“The CBN will undertake a Retail Dutch Auction System to mitigate the demand for eligible transactions,” the circular stated. The reintroduced retail forex auction is scheduled for August 7.
The naira has recently faced significant pressure due to seasonal demand from summer tourism and the needs of businesses importing goods. On Friday, the currency lost 2.9 percent to close at 1,617 naira per dollar, according to data from FMDQ, as compiled by Bloomberg. Over the past year, the naira has declined by approximately 70 percent, following reforms intended to allow it to trade freely and attract foreign inflows.
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