Delay in resolving $2.4bn CBN’s FX forwards contracts threatens economy

PHILLIP ISAKPA IN LONDON, UK

The lingering delay by the Central Bank of Nigeria (CBN) to reach a final resolution on its controversial position over $2.4 billion worth of foreign exchange forward trading contracts is creating an undercurrent that is producing multiple negative impacts on the economy, sources familiar with the situation have said.

Fears of a broader impact on companies and the economy if a settlement is not reached soon are being expressed by multiple sources.For instance, they said failing to settle this matter quickly could lead to companies involved having their operations face severe consequences, including taking a loss of about N2.4 trillion with pass-on effect on company income tax over the next two to three years.

“You should also expect that to impact negatively on government revenues as loss making companies can not pay tax to the government,” said a financial analyst.

The CBN earlier in February drew attention to what it said were questionable FX forwards transactions with a total value of $2.4 billion and decided that it would not honour what many say were binding contracts that required the apex bank to provision foreign exchange to meet the obligations upon their maturation.

Although the apex bank did not provide full disclosure of the specific transactions and those affected, it has since emerged that the CBN may have inadvertently lumped legitimate transactions involving companies, especially manufacturing and trading entities with strong roots in the Nigerian economy, into this group and thereby unleashing ripple effects across a value chain of sectors.

“We are talking about sectors that cut across manufacturing, SMEs [small and medium scale enterprises], banking, insurance, maritime, all with broad impact on both the private and public sectors, including government revenues,” said the source.

Fashola Shuaib, a financial analyst, described the invalidation of the $2.4 billion forward contracts by the CBN as a significant setback for manufacturers, noting that it further exacerbates the economic crisis of the country.

“Urgent measures must be taken to address this issue and provide much-needed relief to businesses struggling to survive amidst unprecedented challenges,” he said.

Multiple sources familiar with the controversy have told Business a.m. that a full picture of the forward transactions that has led to the current state of things is necessary for context and understanding as it would help to show why the CBN has inadvertently put genuine businesses in harm’s way.

For instance, one source said that it has never been in doubt that the forwards are liabilities of the CBN, but which it is now trying to renege on. According to him, these FX forwards liabilities were signed off by the CBN when they were allocated.

Importantly, however, is that a strong claim is being made that the beneficiaries of the forwards contracts are responsible corporates and SMEs who are bonafide members of Nigeria’s organised private sector (OPS). This has led to questioning why the CBN is still delaying a re-examination of its decision not to honour this obligation.

Business a.m. learnt that upon the consummation of the forwards contracts between 2022 and 2023, the genuine companies now caught in the mess, used banks’ consort lines to open letters of credits (LCs); paid import duties on the goods imported; received the goods; and had the suppliers settled by their banks’ correspondent banks.

According to sources, what is left is for the CBN to settle the contracts on maturity but this has not happened with the CBN deciding now that it would not honour forwards contracts worth $2.4 billion in value.

Analysts say there are indeed wider implications for the economy if the CBN does not take a much broader second look at the matter with a view to ensuring that genuine corporates and SMEs caught in the apex bank’s decision do not suffer much further.

For instance, the CBN’s slow review of the decision to sanction genuine SMEs and corporates by refusing to honour the FX forwards contracts now represents a significant threat to jobs estimated to be in the neighbourhood of 270,000 workers.

Business a.m. learnt that the CBN had told the entities affected by the decision that the Economic and Financial Crimes Commission (EFCC) was investigating the matter, and the entities hoped that such an investigation would be swiftly undertaken so that they can be exonerated. But nothing has been heard since about the EFCC investigation. 

Meanwhile, the corporates are bleeding and are under intense pressure from their banks and suppliers.

There are also fears that some banks could take a hit from the fallout of this CBN decision, including triggering bank losses. “You are already seeing situations where confirmation lines used are not being serviced by the SMEs and corporates,” explained an analyst.

Already, financial statements issued by banks for the first quarter shows huge provisioning for non-performing loans and analysts say it is not out of place to see that some of these could be related to provisioning by banks for the stalemate the genuine SMEs and corporates are having with the CBN over these FX forwards contracts.

As one analyst wrote for this paper this week: “Indeed, the first quarter 2024 unaudited reports of eight banks submitted to the Nigerian Exchange show that provisioning for loan losses had spiked from N45.13 billion in the first quarter of 2023 to N247.91 billion as at the end of the first three months of 2024. The list of these banks include: Guaranty Trust Bank (GTB), Zenith Bank, FCMB, Fidelity Bank, Stanbic IBTC, Access Bank, Wema Bank and UBA. While these NPLs in the books of these banks are growing, neither the high rate of inflation in the economy is dropping nor the FPI inflow continuing.”

Those who are close to these entities say even the CBN could also be affected, noting that the fragile FX market which is being rebuilt by the apex bank will come under severe pressure and exchange rates could easily go as high as N3,000. 

“The call, therefore, is for the CBN to settle the forwards and get the EFCC to prosecute companies involved in any act of round tripping or abuse in the utilisation of the forwards,” said an investment analyst close to some of the affected entities.

Financial analyst Falola Shuaib said of the current stalemate over the matter: “This isn’t just about numbers; it’s about the lives and livelihoods of millions of Nigerians. We must act with transparency, fairness, and a commitment to sustainable development. This is not the time for knee-jerk reactions and opaque pronouncements.

“This is the time for clear communication, collaboration, and decisive action to steer our nation away from the impending economic tsunami. Together, we can build a stronger, more resilient Nigeria, but only if we choose the path of transparency and act with urgency. 

“It is important for the CBN to re-evaluate this policy direction and ensure that customers with valid export documentation are exempted from the list of invalid forward contract obligations.

“This can be ascertained by requesting documents to prove funds was utilised for importation such as:

1. Valid Form M approved by the CBN
2. Evidence of establishment and transmission of LC
3. Bill of Lading Documentation
4. Evidence of Custom Duty payments for imported products”