The Central Bank of Nigeria (CBN) has begun to clear the backlog of foreign exchange forward contracts — a move that is expected to bring relief to the naira, the business community and the economy at large.
The country has faced chronic dollar shortages since foreign investors exited local assets during a period of low oil prices. Since then, investors are yet to return and the central bank has struggled to meet the demand for dollars from foreign investors seeking to repatriate funds or airlines seeking to send money from ticket sales abroad.
On Thursday, people with knowledge of the matter who spoke to BusinessDay said the CBN has started clearing the backlog and delivered on over 75 percent to 80 percent of outstanding matured FX forwards in some specific banks.
BusinessDay’s findings showed the international banks settled include Citigroup, Standard Chartered, and Stanbic IBTC.
“We have been directed to inform you that the CBN has delivered all outstanding matured forward forex. We thank you for your patience and cooperation, and value you for your business and partnership,” Citigroup said in a letter to clients on Thursday.
14 banks paid so far, says spokesman
Further findings showed FX forward contracts delivered this week include Citigroup ($72 million); Stanbic ($125 million) and Standard Chartered ($63 million).
“They also cleared all outstanding from around 10 small banks with less than $10 million each,” a source said.
Four banking sources said the banks were paid varying amounts totalling about $1 billion and that the payments would continue in the next few weeks.
While a few of the lenders were paid the entire amount owed, others got as much as 80 percent, the sources said.
“The CBN has started paying the FX backlogs to banks. So far, 14 banks have been paid,” Isah Abdulmumin, spokesman of CBN, told Reuters but declined to give the amount or names of the banks.
Yinka Ogunnubi, a finance professional, said the FX payments by CBN will go offshore to liquidate outstanding positions in correspondent banks which will help in freeing up trade lines and also improve our credit ratings.
“It is not a solution. It is not an intervention. It is the CBN paying its debt. It is the CBN not defaulting on obligations it is legally bound to fulfill since it sold FX forwards going back many months ago,” Ogunnubi said on social media platform X.
Nigeria has nearly $7 billion in FX forwards that have matured which corporates bought from local banks. Banks then repaid foreign credit lines with their own funds when the central bank did not pay out.
The central bank’s payments follow the October 23 announcement by Wale Edun, the finance minister, that Nigeria was expecting $10 billion of inflows to improve FX market liquidity. It will come as a relief to local lenders, who have been struggling to meet demands from customers due to chronic dollar shortages in Africa’s largest economy.
“The new move by CBN to clear backlogs with international lenders gives the signal that the apex bank is back in trading and business,” Gabriel Idahosa, deputy president of Lagos Chamber of Commerce and Industry, said.
“Apart from bringing back letters of credit, it generally brings back confidence in the traditional market. It restores the confidence of portfolio investors and international airlines. It will also bring foreign direct investments,” he added.
The naira gained 55 against the United States dollar at the black market on Thursday. It opened at N1,220 per dollar but closed at N1,165.
LCCI, manufacturers hail move
Toye Folosho, a director at the Manufacturers Association of Nigeria, said CBN’s clearing of the backlog is a good one for the manufacturing sector because a lot of manufacturers have not been able to procure their raw materials and machinery.
“Recently, a member told me that his payment to his exporter has been due for two months now and his credit portfolio is galloping seriously which could throw his business into a serious crisis,” he added.
Some analysts have wondered where the CBN got dollars from into the FX-starved economy.
“It is difficult to say where they are getting the supply from,” Olaolu Boboye, an analyst at CardinalStone Securities, said.
Wale-Smatt Oyerinde, director-general of the Nigeria Employers’ Consultative Association, said there is no doubt that the economy lacked the requisite dollar to completely close down the outstanding matured FX in banks.
“The actions of the new administration through the CBN have shown tremendous improvement in FX management which was a huge challenge in the last administration,” he said.
He said the current CBN management has stepped up its intervention in the FX market, which may account for the 75 percent delivery of the matured FX.
“The sustainability of clearing FX backlog will largely depend on the guarantee of the inflow of FX from all sources that are currently being maximised,” Oyerinde said.
With stable, focused, and growth-induced reforms, other opportunities for FX supply like increased foreign direct investment will be enhanced, he added.