CBN’s unsettled forex forward increases business risks, economic turmoil — MAN

The Manufacturers Association of Nigeria (MAN) is worried that the Central Bank of Nigeria’s (CBN) unsettled forex forward is causing financial strain on manufacturing businesses leading to widespread closures, job losses, and economic turmoil.

Segun Ajayi-Kadir, director general at MAN in statement said the implications of the unsettled forex is that the $2.4 billion worth of forward contracts from the backlog of $7 billion has triggered severe crisis for the manufacturing sector and Nigerian economy.

“Worse still, the commercial banks have continued to charge dollar account along with other Naira bank charges such as 35 percent interest rate on the facilities that these companies have with their banks,” Ajayi-Kadir said.

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He explained that foreign exchange forward contracts are financial instruments and are globally practiced to enable businesses to hedge against exchange rate fluctuations by locking in a future exchange rate.

“The Central Bank of Nigeria traditionally issues these contracts, promising to deliver foreign currency at a specified future date in exchange for upfront naira payment,” he noted.

However, the MAN’s managing director pointed out that the CBN recently announced its inability to honour $2.4 billion worth of forward contracts, citing an ongoing investigation by the Economic and Financial Crimes Commission into some foreign exchange transactions.

“It is expedient to note that many businesses borrowed money from banks for working capital that was used by the banks to open clean line for letter of credit for the companies based on the allocated forward contract from the CBN,” he noted.

But he frowned at the fact that no clear allegations or infractions have been communicated to any of MAN’s members and non-have been indicted for any infractions; and that the forwards have remained unredeemed.

“All these have significantly eroded the working capital of the companies who barely make margins of five percent on the sales of the products. This rather worrisome breach of contract has further exacerbated currency risk for businesses, leading to substantial financial losses and operational disruptions.

“Businesses with substantial foreign exchange liabilities face acute credit and liquidity risks due to their inability to settle forward contracts. This strains cash flow and jeopardises overall financial stability,” he said.

In addition, he said; “While many small and medium-sized enterprises have been forced to close or temporarily suspend operations, larger corporations have incurred massive foreign exchange losses exceeding over N300 billion in the second half of 2023.

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This situation has been exacerbated by the continuous depreciation of the naira, which has depreciated by more than 72 percent, from N450 to N1600 per dollar over the past year.”

MAN decried the fact that financial planning and budgeting have been severely compromised due to the uncertainty surrounding future exchange rates.

“The cascading effects on the economy are far-reaching, impacting production, employment, government revenue, and overall economic growth. Quite frankly, the CBN’s non-fulfillment of its forward contract obligations has led to a cascade of negative consequences. Manufacturing concerns have been worse hit.

“For instance, within the last six months, companies have incurred over N1.5 trillion in forex-related transactions losses, contributing to the poor and worsening performance of many businesses,” the statement reads.

This crisis, MAN said, has disrupted manufacturing supply chains, hindered productivity, and jeopardised job security. Consequently, businesses are struggling to meet their loan repayments, leading to the rescheduling and restructuring of loan terms.

“Due to numerous challenges, such as high production costs and low consumer demand currently confronting manufacturers, there is little hope of meeting financial obligations as scheduled. As a result, these rescheduled loans often come with higher interest rates.

“The immediate implication of this is the declining contribution of the sector to the overall economy. The erosion of trust among foreign suppliers and financial institutions, triggered by businesses’ inability to honour their initially issued letters of credit, has further compounded the challenges of foreign financial flows and investment in the country,” MAN said.

According to the association, “All these adversely affect the business operations and the Nigerian economy at large. MAN has done a detailed analysis outlining the far-reaching consequences on the manufacturing sector.”

Hence, it implores the CBN to give serious and expedited consideration to the imperative of the sanctity of contracts, explore avenues to resolve outstanding obligations, and prioritize the interests of businesses that have acted in good faith.

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Reneging on these legally binding contracts potentially undermines the CBN’s credibility and may damage investor confidence.

“The manufacturing sector has borne the brunt of this crisis, with a staggering 108.7 percent increase in job losses in 2023 alone. To prevent further damage, MAN urges collaboration between the CBN, the Federal Ministry of Finance, and the private sector to develop a sustainable framework for resolving outstanding forward contracts and improving foreign exchange inflows.

“By prioritising the survival of the manufacturing sector, the government can mitigate the negative impacts of this crisis and foster economic recovery. The continued non-redemption of the $2.4 billion forward contracts poses a grave threat to the survival of some Nigerian manufacturing companies and jeopardises the livelihoods of thousands of workers,” MAN noted.