As naira continues free-fall, all CBN offers is more promise to act

…experts profer ways CBN can deal decisively with FX backlog

The foreign exchange market seems to hold promises from the Central Bank of Nigeria (CBN) to stabilise the naira with a pinch of salt.

The CBN said it plans to clear a foreign exchange backlog estimated by Finance Minister Wale Edun to be about $5 billion within a short space of time as it seeks to attract investment back into the economy and reduce pressure on the naira, which hit a fresh low.

On Monday, an additional $500 million of that backlog was cleared.

The central bank said in an emailed statement on Monday that it “released $500 million to various sectors” of the economy, almost two weeks after paying about $2 billion to settle outstanding commitments across industries including manufacturing, aviation, and petroleum.

It said it intends to clear all the backlogs “within a short time” and resolve “fundamental issues that have hindered the effective operation of the Nigerian foreign-exchange markets.”

Naira sinks to 1,482.57/$ on official market

But the pressure on the naira intensified on the day, despite the CBN’s promise to deal decisively with the backlog. The naira hit a fresh low of 1,482.57 per dollar on Tuesday on the Nigerian Autonomous Foreign Exchange Market, down from 1,348.63/$ on Monday, and is now pushing above N1,500/$ at the parallel market.

The backlog has made Africa’s biggest oil producer unattractive to foreign investors, as it makes it difficult to repatriate earnings due to the acute dollar shortage.

Earlier this month, foreign airlines in Nigeria threatened to strike unless the government allowed them to repatriate their funds.

How CBN can deal decisively with FX backlog

It comes as a surprise to many that the naira is in free fall despite the CBN prioritising the FX backlog that has accumulated for more than three years.

To financial experts, however, it is no surprise. The CBN, they say, is losing the plot in its approach to clearing the backlog.

They argue that the central bank’s approach of clearing the backlog in bits and pieces while shelving fresh sales of dollars in the open market is responsible for the naira’s plunge.

The CBN has not sold dollars in the open market since September 2023 because it has focused on selling dollars to clear the backlog.

Despite its undivided focus on the FX backlog, the naira is plummeting and there’s still an outstanding $4.5 billion to be sorted when the latest sale of $500 million is deducted from the $5 billion estimate given by the finance minister at Davos this month.

There is a clear indication that more creative ways need to be explored in dealing decisively with the backlog, according to Bola Onadele .Koko, CEO of FMDQ Group, whose shared advice during an interview on Arise TV.

Onadele .Koko, one of Nigeria’s leading financial experts, argued that the CBN’s current approach of using the small amount of dollars it has managed to secure to settle the backlog may not bring much-needed relief to the FX market.

He advised the CBN to use the small amount it has fought long and hard to secure to invest in a zero-coupon 30-year US Treasury, which could then be collateralised to raise substantial cash from investors.

“How about using $5 billion that you have to buy a 30-year zero-coupon US Treasury that takes you to about $15 billion and then use that investment ($15 billion) as collateral to borrow $15 billion today?” he said.

If Nigeria did that and obtained a loan of $15 billion using its investment in the zero-coupon 30-year US Treasury as collateral, the CBN would have more than enough dollars to clear the backlog.

The apex bank will also have enough firepower to intervene in the market and stabilise the naira while buying time for the return of foreign investors to the market.

The problem, however, is that Nigeria sometimes ignores the wise counsel of its brightest financial experts, according to Tajudeen Ibrahim, director of research and strategy at investment bank Chapel Hill Denham.

“We could also explore the possibility of securitizing dividends from NLNG over a period of years to get dollars today in similar fashion to the Afrexim deal but with much better terms,” said Ibrahim, who also criticised the CBN’s approach of throwing the little dollars it has at the backlog.