CBN’s Invalidation of $2.4bn Forward Contracts as Crushing Blow to Manufacturing Sector

Donatus Eleko

In a move that has sent shockwaves through Nigeria’s already fragile economy, the Central Bank of Nigeria (CBN) earlier this month announced the invalidation of approximately $2.4 billion worth of forward contracts sold to manufacturers. The development, with its far-reaching consequences, comes at a time when the nation is grappling with a myriad of economic challenges, exacerbating the woes of both small and large-scale manufacturers alike.

The CBN Governor, in an interview on Arise News Channel gave reasons for the invalidation to include not having valid import documents; entities did not exist but got allocations; entities who asked for FX but got more than what they asked, and those that did not ask for FX but got allocations.

Indeed, the current state of affairs in Nigeria paints a grim picture. Businesses across various sectors are reeling from the impact of inflation, heightened by dwindling purchasing power and currency devaluation. The ripple effects of these economic hardships have led to a surge in unemployment, underemployment, and a sharp increase in crime rates within the country.

The invalidated forward contracts, amounting to a staggering $2.4 billion, were originally entered into by manufacturers seeking to hedge against currency fluctuations and mitigate exchange rate risks. However, the CBN’s decision to render these contracts null and void has left these manufacturers in dire straits, with devastating financial implications.

For over a year, manufacturers have been saddled with the burden of paying naira interest on the funds utilised to purchase the forward contracts, compounded by substantial post-negotiation charges. Despite these hefty financial commitments, many manufacturers find themselves unable to recoup their investments as the forward contracts matured amidst an unprecedented surge in the exchange rate.

The stark contrast between the prevailing exchange rates at the time of contract initiation and the current FX landscape has further compounded the financial crisis faced by the companies. Manufacturers who purchased goods and conducted business based on exchange rates ranging between N600 to N700 to a dollar, are now confronted with an exchange rate that has soared well beyond N1800/$. For instance, companies with $5,000,000 forward contract invalidated by the CBN, would experience a staggering loss of between N5 billion and N6 billion loss on FX for previous year transactions.

The repercussions of the invalidated forward contracts are catastrophic. Small companies, already teetering on the brink of collapse, now face imminent closure, exacerbating the unemployment crisis and further stifling economic growth. Larger corporations, faced with mounting forex losses, are contemplating exit strategies, dealing a severe blow to Nigeria’s investment climate and overall economic stability.

What is perhaps most alarming is the apparent lack of consideration for the dire economic realities faced by Nigerian manufacturers. The CBN’s decision to cancel $2.4 billion worth of forward contracts without engaging stakeholders to assess the impact on an already beleaguered economy is deeply concerning. Moreover, the failure to compensate manufacturers for the interest costs incurred over the past 12 months while their funds were held by the CBN adds insult to injury.

Clearly, the delivery of the forward contracts was expected to be utilised by the banks to liquidate the foreign obligation on their correspondent banks. These lines were utilised for valid Letters of Credit transactions, approved by the CBN and shipments received by the customers in Nigeria.

Therefore, the cancellation of the forwards implies that the foreign lines availed by the correspondent banks would be clogged and classified as bad debt due to the tenors fallen after 180 days of establishment. This would force the correspondent banks to take further risk measures on the available line to Nigeria banks and reduce the capability of the real sector to undertake trade transaction.

Also, the inability of the CBN to honor matured forward contracts constitutes a default risk to the central bank. The key questions being asked should be how would the manufacturers hold CBN accountable for failing to honor contractual agreements for valid transactions approved by them instead of turning around to declare the same transactions invalid.

In addition, as part of the transaction dynamics for the forward contracts, customers’ accounts were debited with the naira equivalent of the allocated dollars for the transactions. These funds have been deposited with the CBN for over a year. The CBN should pay interest to cover all interest and bank charges incurred by the customer as the funds were deposited with the apex bank. This has become pertinent to note that some of the forward contract payments were funded using bank loans and the customers has suffered significant finance cost and charges on these transactions.

The apex bank disclosed that some FX allocation was declared invalid because some entities got more than what they asked. Further investigation revealed that the CBN gave approval for the re-allocation of the excess forex for other valid transactions and have turned around to reverse its own approvals granted to the customer. This requires further evaluation to prevent a situation where the CBN is acting as a Judge and Jury in the same circumstance.

These approved transactions by the CBN is expected to be honored as the customers have complied with the laid down procedures for handling such matters.

Indeed, the declaration of $2.4 billion forward contract forex transaction invalid has huge implication for the market. The current forex market lacks sufficient liquidity to meet the daily requirement of the real sector and by this decision, the CBN has increased the demand side with a potential $2.4 billion that is required to be sourced by customers. This would further devalue the Naira, increase cost of production and inflation within the country.

The adverse effect of this decision is disastrous to the manufacturing sector. This is premised on the fact that the forwards had been utilised to established LCs for valid form M transactions at rates within N600/$1 and the repayments of the obligations would have to be done at N1,500/$. Due to the devaluation of the Naira, the policy declaration of the CBN has increased the cost of transaction by N900/$.

This has also increased the borrowings of the customers as more loans will now be required to be utilized to meet the same obligation that was contracted with the CBN. The associated increase in Finance cost and repayments are huge and detrimental to the manufacturing sector.

In terms of its impact on the economy, the pronouncement by Cardoso would result to higher unemployment rate as due to the increased in the cost of operations, various companies would be forced to downsize their work force and could lead to high unemployment rate within the country. The industry is currently burdened with the effect of fuel subsidy removal and devaluation of the naira that has led to hyper increase in the cost of production. With the cancellation of forward contracts that had already been utilised for LC establishments, shipment and costing of products already sold by these companies, it would be practically impossible to recover this cost on current production.

With the gradual collapse of the manufacturing sector under the current policy direction of the CBN, the projected GDP growth rate for the country may collapse and the attendant impact on the microeconomic variables of the Federal Government will be adverse.

This policy will further lead to increase in the cost of production as manufacturers will grabble with survival instinct to save their respective businesses. The masses would be unable to meet their daily needs and this may lead to agitation across the country. It is important for the CBN to re-evaluate this policy direction and ensure that customers with valid export documentations are exempted from the list of invalid forward contract obligations.  This can be ascertained by requesting documents to prove funds was utilized for importation such as Valid Form M approved by the CBN; evidence of establishment and transmission of LC; bill of lading documentation, and evidence of Custom Duty payments for imported products

This would help the CBN separate genuine customers that have utilised the forex allocation for legitimate business from those who may have diverted the forex for other uses. The current approach of the CBN is punitive and has far reaching adverse effect on the economy. The CBN must also note that all the forex allocation was legitimately awarded by the apex banks and cannot seek to declare invalid same based on technicalities.

In conclusion the invalidation of $2.4 billion forward contracts by the CBN represents a significant setback for Nigerian manufacturers, further exacerbating the economic crisis gripping the nation. Urgent measures must be taken to address this issue and provide much-needed relief to businesses struggling to survive amidst unprecedented challenges. Cardoso, must also be reminded that as a result of failure to honour these contracts, the outstanding foreign loans continue to accrue interest (post-negotiation charges), which the commercial banks are passing to their customers. This is also a clarion call on the Senate President, Senator Godwill Akpabio, President Bola Tinubu and all well-meaning Nigerians to intervene in the matter.