Resolving Pending FX Forward Obligations to Boost Economy

James Emejo writes on the urgent need to settle the outstanding Foreign Exchange (FX) forwards to salvage the economy from the brink of collapse

Shortly after assuming office in September 2023, the Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso, granted an interview to Arise Television, a sister broadcast arm of THISDAY, where he reassured investors and stakeholders on the bank’s commitment to resolving the mounting FX obligations inherited from the past administration.

Cardoso’s interaction came at a critical time when investors were losing confidence in the economy amid uncertainties resulting from the political transition and the unpaid FX liabilities estimated at about $7 billion.

The CBN governor, however, revealed that about $2.4 billion out of the acclaimed $7 billion outstanding FX 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 obligations remained at $2.2 billion.

The central bank governor further indicated that part of the headline FX claims was invalid, citing the outcome of a forensic audit by Deloitte Management Consultant which the apex bank commissioned.

Cardoso had insisted 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 contracted the Economic and Financial Crimes Commission (EFCC) to investigate suspicious transactions and prosecute individuals and entities with fraudulent entries.

However, over six months after his pronouncement, the EFCC is yet to conclude its probe, prompting anxiety among affected companies whose genuine FX biddings had been trapped.

These companies – mostly corporates and SMEs have expressed worry that the outcome of the investigation appeared to be 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.

·      Forwards as contracts

Essentially, FX forward entails a financial derivative contract between two parties to exchange a specified amount of one currency for another at a predetermined exchange rate on a future date.

Unlike spot transactions, which settle immediately, FX forwards are settled at a future date, providing a mechanism for hedging against FX risk or speculating on currency movements.

Here, the two parties agree on the notional amount, exchange rate, and settlement date. This agreement can be further customised based on the needs of the parties while the terms of the forward are documented.

The contract involves a buyer and a seller, which can be corporations, financial institutions, or individuals while the specific amount of currency to be exchanged is agreed upon by both parties, as well as the rate at which the currencies will be exchanged on the settlement date, fixed at the time of contract initiation. The future date on which the currency exchange will occur, also known as the maturity date is often determined.

In addition, forwards are financial instruments used by the CBN to manage foreign exchange reserves and influence exchange rates, and represent agreements between the apex bank and a counterparty to exchange a specified amount of foreign currency at a predetermined rate on a future date.

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

·      Settlement overdue/Implications for economy

However, the transactions in question which occurred between 2022 and 2023 are yet to be settled by the CBN.

Analysts have continued to express concerns that these unsettled forwards could potentially erode investor confidence in a struggling economy with all the attendant implications.

Moreover, failure to honour genuine forwards could have significant implications for companies, especially their financial, operational, reputational, and regulatory aspects.

Among other things, unsettled forwards could result in immediate financial losses as companies may need to enter the spot market at potentially unfavourable rates to meet its currency needs.

Also, where forward contract was meant to hedge against adverse currency movements, non-settlement could expose the company to currency risk, leading to increased costs if exchange rates move unfavourably as the case is presently in the country.

The company’s counterparty may incur losses due to the failure, which could lead to legal claims and financial compensation demands and disrupt the company’s cash flow management, as expected receipts or payments in foreign currencies are not realized as planned.

Analysts further emphasised that repeated failures to honour FX forwards might indicate weaknesses in internal controls and risk management practices, necessitating a review and overhaul of such systems among other negative implications.

·      Huge toll

Reports have already indicated the fact that with the non-settlement of forwards, companies are about to lose about N2.4 trillion which will no doubt impact their profits over the next two to three years as well as threaten federal government’s income.

Yet, there are growing concerns by Nigerian corporates and SMEs that the non-settlement could take a toll on the fragile FX market which is being repositioned by the apex bank as it would come under severe pressure, and potentially drive exchange rates to about N3,000, THISDAY gathered.

 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, thereby worsening the country’s unemployment challenges.

A source told THISDAY that “While CBN says EFCC is investigating, the corporates are bleeding and under intense pressure from their banks and 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, insisting that not all the pending liabilities are fraudulent.

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.

·      Analysts’ perspectives

In an interview with THISDAY, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, urged the CBN to separate the genuine claims from suspected fraudulent transactions in the interest of the economy.

He said, “There are two sides to these claims: Firstly, CBN said they are still investigating these claims, and there may be some suspicious claims being investigated. Amongst the claims may also be very genuine claims.

“Whatever the case may be, investigation cannot be forever. The outcome of the investigation should be out by now after a reasonable time.”

Ekechukwu, who is a former Director General, Abuja Chamber of Commerce and Industry (ACCI), also said, “I agree that business and counter-party confidence may be affected adversely. We do expect that the apex bank will assess the claims in their entirety and sieve the chaff from the substance in order not to affect genuine corporates from pursuing their business goals.”

Also, Chairman, Nigerian Economic Summit Group (NESG), Mr. Niyi Yusuf, described the development as worrisome adding that the group was 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 the 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 afterward.

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 a 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 as such. 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 prevailed on 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 the layoff 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 tenable 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”.

He said, “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.”