As CBN Moves to Resolve FX Challenges, Stabilise Naira

James Emejo, analyses the current reform initiatives by the CBN, which are targeted at resolving foreign exchange challenges, enhancing financial sector resilience, stabilising the Naira as well as boosting investor confidence in the economy.

One of the major excuses adduced for the dearth of foreign investors in the country had been the liquidity crisis in the nation’s foreign exchange segment.

The challenge precedes the present administration of President Bola Tinubu. Investors often complain about their inability to repatriate their funds whenever they choose to.

The foreign airlines have regularly made headlines by suspending operations or threatening to do so because of the FX liquidity challenges bedevilling the country.

Analysts believed Nigeria had become unattractive to foreign investors because of the FX shortages experienced.

The problem is worsened by the fact that foreign capital inflows had continued to diminish in recent times partly as a result of insecurity and alleged unfriendly investment climate in the country.

In December 2023, the National Bureau of Statistics (NBS) reported that the country’s total capital importation declined by 36.45 per cent to $654.65 million in the third quarter of last year (Q3 2023) compared to $1.03 billion in the preceding quarter.

The dip in foreign capital inflow came at a time the President Bola Tinubu’s administration is making frantic efforts towards attracting foreign capital into the country amid the current FX shortages which had impaired investors’ confidence.

The country’s inability to earn significant foreign exchange from non-oil exports is also responsible for the FX shortages, being largely a consumer economy.

Afrexim’s FX Liquidity Lifeline

The federal government recently announced that it received $2.25 billion out of the $3.3 billion foreign exchange (FX) facility from the African Export–Import Bank (Afreximbank). The long-awaited credit support was meant to ameliorate the acute FX shortage in the country, which had constrained economic activities and doused investors’ confidence.

Disputed FX claims

It was reported that the federal government’s total FX liabilities ranged in the region of between $7 billion and $10 billion, a figure which had been disputed for long and finally laid to rest by the CBN.

In his recent major interview granted to Arise Television, the broadcast arm of THISDAY Newspapers, Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso, clarified that the following a forensic audit commissioned by the bank, it was discovered that $2.4 billion out of the acclaimed $7 billion outstanding foreign exchange liabilities of the federal government were not valid for settlement.

The CBN governor also stated that the bank had settled verified FX requests, which amounted to $2.3 billion adding that current total outstanding FX obligations remained at $2.2 billion. This was a far-cry to the headline FX backlog claims.

If anything, the interview revealed recent policy direction of the apex bank in terms of the various reform initiatives to correct the imperfections in the FX market and stabilise the Naira. Cardoso, who further indicated that part of the headline $7 billion outstanding FX claims was fraudulent, referred to the outcome of a forensic audit by Deloitte Management Consultant, which was commissioned by the apex bank.

The central bank governor also expressed confidence that that the outstanding FX liabilities would will shortly be addressed, maintaining that the CBN would not pay for FX requests that are not validly constituted, adding that the bank had written to authorised dealers to explain the disparities identified.

He said, “And sadly, quite frankly, I think much of those have not been disputed to our satisfaction.”

Commenting on the outstanding FX obligations, the central bank governor said, “And so, we contracted Deloitte Management Consultant to do a forensic of all these obligations and to actually tell us what was valid and what was not of course, we were committed to ensuring that we would pay all valid transactions.

“And the result that came out of this was startling in a great respect; it was quite startling. We discovered that of the roughly $7 billion, about $2.4 had issues, which we believed has no business of being there – and the infractions from that range from so many things; for example, not having valid import documents and in some cases, even entities that did not exist and in some cases, beneficiaries and account parties that asked for FX and got more than they asked for.

“And those who didn’t even ask for any and got. So, there were a whole load of infractions there which I said amounted to about $2.4 billion of out the $7 billion headline figure.”

He said, “We are not paying if you don’t qualify; they are not a validly constituted requests; and of the validly constituted ones, we have settled about $2.3 billion and that applies to the airlines and a whole load of different entities spread throughout our economy – we’ve settled that already.

“And now what remains is about $2.2 billion to be settled now and I am confident that we will shortly be addressing those and be able move on and make progress.

“Now, how are we dealing with those that are not valid?  As they were identified, we wrote to the authorised dealers to come in and explain what the situation was and where the numbers differed. And sadly, quite frankly, I think much of those have not been disputed to our satisfaction.”

Further reiterating the bank’s commitment to resolve outstanding liabilities, Cardoso said, “Yes, like I said, I think that would be what would be done very shortly. Now, you can imagine that having $2.2 billion outstanding and $7 billion outstanding are not the same figure.

“So, I think we are at the end of this, to be honest, I will put it that way – we will clear all that very shortly and would move on to the next line of action. I am not concerned that the backlog would continue to be on overhang and I think we’ve come to the end of that road.”

Approvals from stakeholders

The various reforms initiatives of the CBN under Cardoso has continued to received applause from stakeholders and analysts who described the measures as necessary to reposition monetary policy as well as sanitise the FX segment.

For instance, the Bank Directors Association of Nigeria (BDAN) recently commended the on going reform initiatives of Cardoso, which it said, were aimed at strengthening the resilience of the financial sector.

The association, in a statement signed by its Chairman, BDAN, Mr. Mustafa Chike-Obi, pledged full support for the comprehensive measures that underscore the commitment of the central bank towards ensuring the stability and resilience of the banking sector, and urged all banks to fully comply with the new directives and actively participate in the implementation process to achieve full compliance.

The association said it believed the recent guidelines/circulars issued by the apex bank are aimed at fortifying the nation’s financial system.

Specifically, BDAN pointed out that the recent policy that banks’ Net Open Position (NOP) limit for overall foreign currency assets and liabilities should not exceed 20 per cent short or zero per cent long of shareholders’ funds – along with other prudential requirements outlined in the circular, played a critical role in ensuring the effective management of foreign currency exposures.

The bank directors added that by imposing these limits, the CBN seeks to mitigate potential losses that could pose significant systemic challenges, stressing that these regulatory interventions underscore a strategic initiative aimed at bolstering risk management, transparency, and accountability within the financial industry.

The statement said, “The Bank Directors Association of Nigeria (BDAN) acknowledges and commends the Central Bank for its proactive stance in safeguarding the interests of depositors, investors, and the overall economic well-being of Nigeria.

“BDAN views these requirements as a positive step towards creating a resilient financial landscape and preventing adverse effects on the banking sector.

“The association applauds the CBN’s commitment to proactive regulation and remains supportive of initiatives that contribute to the stability and prosperity of the Nigerian economy.”

The group further acknowledged the meticulous work undertaken by the apex bank in consulting stakeholders and experts to ensure a balanced and effective regulatory approach.

“As advocates for responsible banking and ethical conduct, BDAN believes that these guidelines will contribute significantly to the long-term sustainability, growth, as well as the overall efficiency, transparency, and stability of the banking sector, ultimately contributing to the nation’s economic development.

“BDAN pledges its continuous collaboration with the Central Bank of Nigeria and other stakeholders to foster a dynamic and resilient financial ecosystem that serves the interests of all Nigerians.

“We believe that these steps are in the right direction to improve the effectiveness of the banking system and we are fully in support,” the statement added.

Also, analysts in separate interviews with THISDAY agreed that Cardoso’s Arise Television interview clarified number of sketchy issues.

Analysts also commended the bank’s transparency and efforts towards clearing the outstanding FX obligations, adding that this would boost investor confidence in the economy.

Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, said, Nigerians and foreign investors will be encouraged by the utterances of the CBN governor.

He said, “Undoubtedly, the FX situation has been a major concern to the Nigerian economy, given its rapid devaluation in recent times. Foreign portfolio investors who may have hitherto shied away from investing in Nigerian securities may be more encouraged to do so now.” 

Shelleng said, “The much-highlighted backlog of FX demand has hopefully been deconstructed to provide a more positive outlook. With the greatly reduced backlog figures touted, it is surely more palatable. It’s easier to see how the government can resolve it, especially given the anticipated return of FPIs.

“However, it remains to be seen if there will be increased activities in our equities and bond markets. What is likely is that sovereign bond yields are likely to increase to attract more FPI.”

Also, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said “The interview by Mr Cardoso, the CBN Governor can be seen as laying out the policy framework of his administration.  The new management of CBN met a challenging situation in the bank and it will take bold and calculated measures to return the CBN back to its traditional position.”

He said, “The new policies taken so far is aimed at helping the Naira to find its level and stop the profiteering of banks as regards our FX situation. The willing buyer and willing seller policy for forex is a policy that will eventually strengthen and stabilise the Naira and the economy at large once the other policy measures start yielding fruit. 

“I am very pleased with his plan to reform the Bureau de Change because they are a critical stakeholder that can help the new policies to be effective.  There is need to adequately monitor BDCS activity and ensure they are sourcing FX from CBN.”

Idakolo pointed out that the traditional role of the CBN, which includes implementation of monetary policies and financial sector supervision needed to be improved and appropriate sanctions meted to offenders of laid down guidelines.

“The new CBN team is on the right track if they can ensure stringent implementation of their policies,” he said.

On his part, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said, Cardoso’s interview clarified a number of sketchy policy issues.

He said, the CBN governor was “clear to state that they were going to concentrate on stabilising prices and reducing inflation. And that CBN doesn’t have the capacity to deal with direct interventions. They would have to use Development Finance Institutions (DFIs) to deal with interventions.

“On the issues of settling outstanding FX obligations, he noted that very soon, the balance of $ 2.3 billion of verified amounts will be paid. Although no deadline was stated…”

  Bouquet of reform initiatives

In the widely circulated interview, the CBN governor stressed that in the short term, the bank has put in significant work as well as witnessed results in improving the market structures and removing all the bottlenecks stifling the supply of FX into the country.

Cardoso said, “We have addressed the challenges to remittance flows, reduced the ability of banks to hold on to positions, and more importantly, we now have the export proceeds from the national energy sector flowing back through the central bank. We have also initiated several short-term measures to make naira assets attractive to foreign investors.

“Our policy focus is on achieving rate stability and maintaining market flexibility and liquidity. The move to unify the naira exchange rate and lift currency trading restrictions in June 2023 aims to establish market-driven rates through price discovery.

“This strategy seeks to create a more efficient and transparent FX market to boost investor confidence and reduce market volatility.

“Over the past six months, the bank has taken deliberate steps to enhance liquidity and FX supply in the forex market. All FX transaction windows have been consolidated into the NAFEM platform.”

According to him, “Outstanding FX obligations, particularly those of foreign airlines, have been progressively settled. Enhanced monitoring of FX market activities and a continued emphasis on transparency and price discovery are key priorities. These efforts will be further consolidated in the future.”

He pointed out that the eventual stability of the Naira will be driven by the bank’s ability to address the fundamental issues affecting the economy including bringing inflation under control and promoting the growth of Nigerian businesses to eventually export much more than the consumes as a nation.

Cardoso, further explained that the recent removal of the exchange rate cap by the CBN was to enable International Money Transfer Operators (IMTOS) to disburse remittances at market-determined rates without restrictions, following a willing seller, willing buyer approach.

Additionally, he explained that the recent presidential directive for transfer of the NNPC account to the CBN was meant to increase liquidity in the market, adding that these measures aim to address the FX market’s liquidity challenges, streamline capital flows, and mitigate currency risks.

Also, he said in line with coordinated monetary and fiscal policies, efforts are underway to ensure that all USD-earning agencies and parastatals remit their earnings directly to the CBN to enhance transparency and liquidity in the FX market.

Among other things, the CBN governor also said the bank was exploring mechanisms to incentivise individuals holding foreign currency (FCY) outside the banking system to deposit these funds within the banking system, necessitating the establishment of a legal framework.

He added that discussions are underway on introducing a single FCY gateway bank to centralise all correspondent banking activities, currently dominated by two major banks in the corresponding banking space.

Punishing  FX offenders

Perhaps, one of the nagging questions for Nigerians is whether the CBN intends to prosecute all those involved in fraudulent FX transactions as identified by the forensic audit? But this obviously is a matter of time.