CBN’s $2.4bn contract invalidation puts manufacturers on shaky ground

Onome Amuge

The Central Bank of Nigeria (CBN) recently voided $2.4 billion worth of forward contracts that were sold to manufacturers. The bank explained that these contracts were cancelled because the businesses that purchased them failed to meet certain conditions. 

Specifically, the CBN said that the businesses either did not have valid import documents or were not even real entities. In some cases, the CBN said, businesses that did not even apply for the contracts were allocated foreign exchange.

Olayemi Cardoso, the CBN governor, in a television  interview  monitored by Business a.m., disclosed that a recent audit had uncovered invalid claims in the amount of $2.4 billion out of a total of $7 billion in foreign exchange backlogs in the country. Cardoso stated that only valid transactions will be paid, and that this amounts to $4.6 billion. He added that $2.3 billion of this had already been settled, and the remaining balance would be paid soon.

“We had Deloitte audit the FX backlog claims and we discovered that of the $7 billion, $2.4 billion had issues and had no business being there,” he said.

Cardoso explained that some of the invalid claims were made by entities that did not meet the necessary criteria, and some were even made by entities that did not exist in the first place. This suggests that some individuals or groups may have been attempting to take advantage of the system by making false claims for foreign exchange. The CBN governor stressed that these types of claims would not be honoured, and that the apex bank is committed to ensuring that only valid transactions are paid.

However, the CBN’s decision has left many businesses scrambling to make sense of what happened and how they will be affected.

A forward contract, according to financial analysts, is a customisable derivative contract between two parties to buy or sell an asset at a specified price on a future date. Forward contracts are often tailored to a specific commodity, amount, and delivery date, and are designed to help manufacturers hedge against a change in the price of an underlying asset or commodity.

Uche Uwaleke, a professor of finance and capital markets at Nasarawa State University, considers a forward contract as a type of FX deal that is entered into between two parties at a specified future date and exchange rate.

With a host of economic challenges already plaguing the nation, the decision by the CBN to void $2.4 billion worth of forwards has dealt a crushing blow to manufacturers who were looking to mitigate the impact of currency fluctuations and exchange rate risks. The invalidated forward contracts were originally a lifeline for these businesses, but they have now been left in a perilous position, as they are forced to shoulder the financial burden of this decision.

With some businesses unable to continue operations without the funds from the cancelled contracts, the CBN move has sparked concern over the ripple effects it will have on the economy. 

The financial toll of the CBN’s decision is immense, and it has placed an even heavier burden on manufacturers who have been struggling to keep their businesses afloat. Not only would they be forced to pay interest on the funds they used to purchase the forward contracts, but they have also been hit with high post-negotiation charges. 

To make matters worse, these contracts matured at a time when the exchange rate was skyrocketing, leaving many businesses with a huge loss on their investments. 

The situation has been further exacerbated by the fact that the prevailing exchange rate at the time the contracts were entered into was vastly different from the current rate. At the time, the exchange rate was between 600 and 700 naira to a dollar, but it has since skyrocketed to over 1800 naira to a dollar. This has left manufacturers who were counting on being able to recoup their investments at the original rate facing an enormous loss. For example, a company with a forward contract worth $4 million that was cancelled by the CBN would face a staggering loss of between N4 billion and N5 billion on FX transactions.

According to analysts in the financial services sector, what’s most alarming about this situation is that the CBN seems to have given little consideration to the economic realities faced by Nigerian manufacturers. They noted that the cancellation of the contracts without any consultation with stakeholders has the potential to exacerbate the country’s already dire economic situation. The failure to reimburse manufacturers for the interest costs they incurred while their funds were held by the CBN is also considered a serious oversight that is likely to cause further damage to an already fragile economy. 

The invalidation of the forward contracts is also seen as having serious implications for the forex market, as it creates a supply-demand imbalance that could push up the price of the dollar and ultimately devalue the naira. In addition, businesses may be forced to source an additional $2.4 billion in forex, which could further exacerbate the situation and lead to higher inflation. Moreover, the increase in production costs is likely to be passed on to consumers, who are already struggling with the rising cost of living.

Though the CBN had admitted that some of the forward contracts were declared invalid because some entities received more than what they had requested, analysts noted that the CBN had initially approved the reallocation of the excess forex for valid transactions, but then reversed its decision. This begs the question of why the CBN would grant an approval only to revoke it later. 

Manufacturers  have expressed their frustration with the CBN’s decision to cancel the forward contracts that were sold to them at the rate of N450 per dollar 18 months ago, and are now being asked to pay N1,400 per dollar or more  to get the same funds. 

They also argued that the banks’ inability to honour the forward contracts is having a ripple effect on their ability to do business in a timely and efficient manner. The issue, they noted, is not just a matter of financial loss, but also of the potential damage to the country’s relationship with its trading partners and investors. 

The manufacturers have therefore urged President Bola Tinubu to instruct the CBN governor to reconsider the decision to cancel the forward contracts that have been backed up with proper documentation and are legitimately tied to letters of credit opened by commercial banks. They also pointed out the importance of honouring these forward contracts in order to maintain the stability of the financial system and to ensure that businesses can continue to operate efficiently.

“Imagine sailing on a calm sea, charts meticulously plotted, course set for prosperity. Suddenly, a colossal wave looms on the horizon, threatening to engulf your vessel and everything you hold dear,” was the metaphor Falola Shuaib, an Abuja-based finance expert used to illustrate the situation facing  Nigerian businesses, investors, manufacturers and citizens alike, following the CBN’s action.

According to Shuaib, the situation isn’t just bad news for businesses, but also a national emergency. He pointed out that both large and small businesses are suffering from a lack of liquidity, with many unable to make ends meet and some on the brink of default. This is as banks are also in a difficult position, caught between trying to fulfil their offshore obligations and maintaining their own creditworthiness. 

He added: “The ripple effects are as devastating as they are widespread. The manufacturing sector, already grappling with inflation and a volatile exchange rate, now faces imminent collapse. Nearly 60 percent of companies have already shut their doors, and this policy threatens to wipe out the remaining 40 percent. This translates to millions of lost jobs, plummeting production, and a drastic decline in GDP, pushing countless Nigerians deeper into poverty.”

In order to resolve the current situation, Shuaib suggested that the CBN re-evaluate its policy direction and prioritise the clearance of valid export documentation in order to distinguish between invalid and valid forward contract obligations. 

Shuaib explained that there are specific documents that can be used to confirm that the funds in question were in fact used for legitimate purposes. These documents include:

• Valid Form M approved by the CBN.
• Evidence of establishment and transmission of LC
• Bill of Lading documentation 
• Evidence of custom duty payments for imported products

According to Shuaib, implementing these measures would help the CBN to distinguish between genuine customers who have utilised the forex allocation for legitimate business purposes and those who may have diverted the forex for other uses.