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$2.4bn forward contract put manufacturers, commercial banks in a fix

The Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso told the national assembly that the Apex bank had uncovered invalid foreign overdue claims…

The Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso told the national assembly that the Apex bank had uncovered invalid foreign overdue claims totalling $2.4 billion, which have pressured the naira for long and spooked the currency market.

Mr Cardoso said the discovery was made after an audit by the consultant that the Central Bank engaged brought several shady deals to light.

Data from JPMorgan Chase & Co. compiled by FSDH Research showed that FX forwards stood at $6.8 billion (N3.2 trillion) as of 2022.

The unsettled Foreign Exchange (FX) forward contracts by the CBN have remained a source of concerns among analysts in the financial service sector, as the persistent delays worsened investor confidence.

FX forwards are like a promissory agreement by CBN to allocate FX but will not deliver the real FX until a date in the future. The future date could be 90 days, 180 days or 360 days forward. With this, companies can expect that the forex will be delivered that day for them to settle their offshore obligations of a Letter of Credit (LC).

Explaining the scenario, Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, in a recent media interview said FX forwards is a binding contract between two parties to deliver FX in the future at an exchange rate agreed to in advance.

“Failure to settle or deliver FX forward on the agreed date amounts to breach of contract and could lead to litigations and loss of confidence, which are capable of scaring investors.” he said.

Manufacturers who spoke with Daily Trust on the condition of anonymity said the claims by the CBN Governor lack merit and do not take into account the consequences they will have on businesses, public perception, or the economy.

One of them said: “It is pertinent to state that genuine businessmen, and women across the country, borrowed Funds from commercial banks, some with interest rates as high as 30% to secure forex from the CBN through their respective commercial banks since CBN does not sell the dollars to individuals directly.

“The same funds have been deposited with CBN for the past one and half years for forwards allocated for which the apex bank is now claiming were fraudulent transactions.

“May we remind Mr. Governor that while the CBN allocated the forwards after collecting the naira for each forward allocated, the commercial banks used these same forward contracts as a hedge and issued Letters of Credit (LCs) to their various customers against their offshore credit lines and also as a sovereign guarantee to their offshore banks which stand unpaid till today as a result of the failure of CBN to honour the various forward contracts.”

Another manufacturer argued that as a result of CBN 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: “the same customers you say do not have a genuine claim.”

The affected persons asked, “What will happen to the foreign bank that is expecting their payment to be paid back? What will happen to the businessmen and women who had borrowed Naira from commercial Banks and paid the same into the CBN account for the purchase of forex for over eighteen months? Who will bear the interest charged in borrowed funds locally? Who will bear the charges running against the offshore lines used in establishing letters of credit? What will happen to the businesses? What will happen to the employees that are dependent on the survival of the businesses that CBN is trying to kill?”

They noted that the CBN is killing businesses by cancelling the forward contracts that were sold to them about 18 months ago at the rate of N450/dollar and now selling the same funds to the commercial banks and directing the bank to sell the money at the rate of 1,400/dollar to the same businesses who initially had a forward contract at the rate of N450/dollar.

They argued that the failure to honour these forward contracts is taking commercial Banks longer time to clean the offshore lines already used for establishing Letters of Credit and for which shipments have been done and payment made to LC beneficiaries by the offshore banks. “The delays of the commercial banks to settle their Forex obligations to their offshore banks is making our country’s risk to be very high.”

A source in the CBN who is familiar with the development said: “What happened at the time was that a lot of persons who had anticipated a future rise in the dollar rate front loaded their demands, which further compounded the FX situations because the demand was deemed non genuine.

The manufacturers urged the president to compel the CBN governor to order and reconsider honouring the forward contracts that are genuinely backed up with proper compliant documents for utilisation against each letter of credits opened by the commercial Banks using the forwards as a hedge.

 

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