Companies May Lose N2.4tn as Concerns Mount over Unsettled FX Forwards

•Delays may affect profit tax, FG income, millions of job

•NESG: We’re engaging CBN on the issues 

•NECA, CPPE, Ekpo urge apex bank to act in interest of fragile economy

James Emejo in Abuja and Dike Onwuamaeze in Lagos

There are growing concerns by Nigerian corporates and SMEs that the non-settlement of Foreign Exchange (FX) forwards by the Central Bank of Nigeria (CBN) could take a toll on the economy going forward, THISDAY learned.

Forwards are financial instruments used by the central bank to manage foreign exchange reserves and influence exchange rates.

Typically, they represent agreements between the CBN and a counterparty to exchange a specified amount of foreign currency at a predetermined rate on a future date.

Forwards are liabilities of the apex bank which are signed off when allocated while beneficiaries are often responsible corporates and SMEs from the Organised Private Sector (OPS).

The transactions in question occurred between 2022 and 2023 amid increasing pressure on the apex bank to settle on maturity – this is yet to happen

Analysts who spoke with THISDAY in separate interviews expressed concerns that the unsettled forwards could potentially erode investor confidence in a struggling economy with all the attendant implications. They were unanimous that the apex bank needed to act quickly to resolve the issues.

Earlier in March, the CBN announced that all valid FX backlogs owed to various sectors of the economy had been settled, fulfilling a key pledge of the CBN Governor, Mr. Olayemi Cardoso, to process an inherited backlog of $7 billion in outstanding liabilities.

In a recent interview with Arise Television, a sister broadcast arm of THISDAY, Cardoso revealed that about $2.4 billion out of the acclaimed $7 billion outstanding foreign exchange liabilities of the federal government were not valid for settlement.

He said while the bank had settled verified FX requests which amounted to $2.3 billion at the time, the total outstanding FX obligations remained at $2.2 billion.

The central bank governor further indicated that part of the headline $7 billion outstanding FX claims were not valid, citing the outcome of a forensic audit by Deloitte Management Consultant which the apex bank commissioned.

He maintained 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.

Furthermore, Cardoso said the bank had complained to the Economic and Financial Crimes Commission (EFCC) to investigate suspicious transactions and prosecute individuals and entities with fraudulent entries.

However, many of the affected companies have expressed worry that the outcome of the investigation was taking forever as most of them have used bank confirmed lines to open Letters of Credit (LCs), paid import duties, and received the goods, while suppliers were mostly settled by their banks’ correspondent banks.

A source told THISDAY that “While CBN says EFCC is investigating, the corporates are bleeding and under intense pressure from their banks and their suppliers.”

The stakeholders therefore, called on the central bank to settle the forwards and get EFCC to prosecute companies involved in any act of round-tripping or abuse in the utilisation of the liquidity.

Sources also warned that the continued delay in settling the outstanding liabilities of companies has far-reaching implications for the companies and the economy in general.

THISDAY further gathered that companies could lose about N2.4 trillion which will impact Company Income Tax (CIT) for the next two to three years thereby threatening the federal government’s income.

The development could also exact a huge toll on the fragile FX market which is being rebuilt by the apex bank as it would come under severe pressure, and potentially drive exchange rates to about N3,000.

In addition, these losses could also trigger bank losses as confirmation lines used may not be serviced by the SMEs and corporates as well as put over one million jobs at risk.

Contacted on the issue, Chairman, Nigerian Economic Summit Group (NESG), Mr. Niyi Yusuf, told THISDAY that it is currently engaging with the CBN to resolve the issues.

Director General, Nigerian Employers’ Consultative Association (NECA), Mr. Adewale-Smatt Oyerinde, explained that forward transaction is an agreement whereby a company credits the CBN through its bank for future supply of FX usually within 90 days.

He expressed dismay that data provided by JP Morgan & Co., had estimated unsettled liabilities at $6.8 billion in 2022, which certainly would be higher afterwards.

Oyerinde, said the development had already truncated the smooth running of production plans and capacity utilisation in industries, particularly that of SMEs that do not have the financial clout to explore other liquidity sources.

He further lamented that supply of raw-materials and production cycle had been broken due to the unsettled indebtedness by the central bank, which had ultimately led to low level of business activities, loss of revenues and low profit margins for corporate firms, including the SMEs.

He therefore urged the CBN to prioritise the settlement of outstanding forwards so that the companies involved could move forward and get on with their businesses.

 He maintained that the involvement of EFCC in the matter was unnecessary. 

Oyerinde said, “The CBN had informed the public that some of the FX Forward claims are not genuine and that the Economic Financial Crime Commission (EFCC) is investigating the   issues.

“But the FX Forward is a transaction that involves the companies, their banks and the CBN with definite documentations and approvals. Therefore, due diligence by the CBN should be sufficient in determining the genuine cases.”

 He said the CBN should engage “relevant banks on the claimed outstanding forwards to resolve unsettled cases rather than involving EFCC that is not part of the initial agreement.”

Also, commenting on the issue, Professor of Economics and former member of the CBN’s Monetary Policy Committee (MPC), Prof. Akpan Ekpo, further urged the CBN to settle the forwards to reduce the pressure from suppliers and banks on businesses.

Ekpo, who is also a former Director General, West African Institute Financial and Economic Management, argued that forwards only made sense in an economy that is productive and certain of inflow of foreign exchange, whereas the Nigerian economy is more of a consuming and import dependent one.

He said, “An economy like Nigeria, which depends heavily on crude oil exports for foreign reserves must tread carefully with forwards or not engage in the practice.

“The unsettled forwards by the CBN would have adverse effects on corporates and SMEs, especially the latter. It would affect their ability to procure essential materials required for production.”

He said, “The reduced productivity would result in  layoffs and/or sack of workers further worsening the unemployment rate in the country,” adding that while “Corporates may be able to call on their headquarters for assistance – a situation not possible for SMEs.”

Ekpo further cautioned that the development could effectively erode confidence and trust – sending a wrong signal to potential foreign and domestic investors, adding that “SMEs and corporates would find it difficult to obtain credit lines and loans from banks”.

According to him, “CBN should settle the forwards to reduce the pressure from suppliers and banks. After-all, investigation can continue even after settlement and those found culpable should be brought to book. Delay would affect an already sinking economy.

“The economy needs a push from all angles and not settling FX forwards would further worsen the situation. To save the country, we must build a productive economy.”

In the same vein, Economist/Chief Executive, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, also aligned with the position of the OPS that the CBN should clear the outstanding forward transactions. 

Yusuf stressed that the current operating environment for most businesses remained extremely challenging, particularly with the real sector and small businesses.

He said, “There are macroeconomic headwinds, there are structural impediments, there are multidimensional supply chain challenges.

“Profitability and sustainability of many businesses are at risk. In truth, the plight of workers amid the cost-of-living challenges is a cause for concern.

“But the difficult operating environment for businesses is equally very troubling. These two considerations matter in this conversation and require some delicate balancing.  It is only a business that is thriving that can retain or create new jobs.”