CBN’s unpaid FX forwards hurting Nigerian firms – NACCIMA

NACCIMA President Dele Oye says the non-payment of FX forwards by the CBN has severely crippled companies, causing bankruptcy.

The National President, Nigerian Association of Chambers of Commerce Industry Mines and Agriculture (NACCIMA), Mr. Dele Oye, on Sunday lamented that the non-payment of Foreign Exchange (FX) forwards had severely crippled affected companies, pushing many towards bankruptcy.

He said businesses and banks involved are now burdened with exorbitant interest rates, averaging over 35 per cent.

Speaking exclusively to THISDAY, Oye said the financial strain had damaged the companies’ reputations and strained relationships with international trading partners, who are perplexed by the Central Bank of Nigeria (CBN)’s failure to honour its commitments.

He further claimed that the CBN’s actions have eroded trust and credibility, significantly harming the country’s financial standing on the global stage.

The NACCIMA president who said the association had been proactive in addressing the issue of outstanding FX forwards, maintained that the body had engaged in rigorous advocacy, urging the CBN Governor, Mr. Olayemi Cardoso to reconsider the bank’s stance for several reasons.

There are growing concerns by Nigerian corporates and SMEs that the non-settlement of FX forwards by the 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 – which had not happened.

There are 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.

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.

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

However, the affected companies had 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.

Sources 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 while prosecuting the companies involved in any act of round-tripping or abuse in the utilisation of the liquidity.

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

·Faulty procedures

However, according to Oye, CBN’s decisions lacked procedural fairness as affected companies were neither issued queries nor given an opportunity to respond to the findings before conclusions were drawn.

The association also alleged unilateral breach of contract, explaining that the CBN’s appointment of Deloitte and subsequent actions without involving the companies constituted a breach of contractual agreement, stressing that such unilateral decisions are null and void, infringing on the companies’ right to fair hearing.

Oye also argued that hinted on legal and constitutional concerns, explaining that NACCIMA had communicated that the CBN’s current position was legally untenable.

He said, “We have escalated the matter to the Hon. Minister of Finance, the Hon. Minister of Industry, Trade and Investment, and the House Committee on SME at the National Assembly, highlighting the unconstitutional nature of the CBN’s actions.

He said the broader economic implications of the non-settlement of the forwards were diverse.

He said the reputation of Nigerian companies with their trading partners has been severely damaged as companies face immense financial pressures, threatening their continued operations.

He also said Banks’ reputation and financial health have also been adversely affected.

He said, “If the issue is not resolved amicably, forcing companies to settle at current exchange rates, it could lead to a further crash in the value of the Naira, as the market cannot sustain such a massive demand for US dollars.

“The inability of companies to absorb the exchange rate differences and loan interests could lead to widespread bankruptcies, exacerbating economic instability.”

Oye also emphasised that the delay had severely undermined investor confidence, stating that to remedy the situation, the CBN must resolve the issue promptly to prevent further reputational damage.

According to him, restoring confidence requires the apex bank to communicate directly with each affected company, providing specific details and resolutions.

He said upholding international financial commitments was also crucial to maintaining credibility adding that the bank must ensure consistency and predictability in financial policies will help restore investor trust.

The NACCIMA president further stressed that reneging on financial commitments involving international parties was a significant embarrassment, damaging the CBN’s institution’s credibility both locally and globally.

Furthermore, said the development could lead to massive job cuts as well as create more hurdles for SMEs which remain the heartbeat of the economy.

Oye said , “The non-settlement of FX forwards exacerbates unemployment issues. Affected companies are unable to optimise or expand operations, leading to closures and downsizing. This results in significant job losses, further aggravating the country’s unemployment crisis.

“The unresolved FX scenario is devastating for SMEs, which are crucial for economic growth. The uncertainty and financial strain are stifling their potential, leading to business closures and stunted economic development.

“The economic impact is vast and multifaceted, affecting almost every sector. The size of the transactions and the number of companies involved necessitate urgent intervention. Asking the banks and the affected companies to report to the nearest EFCC office for clearance without any prior invitation is not a viable solution. The President should step in to ensure a swift resolution.”

Analysts wade in

Meanwhile, financial experts have called on the apex bank to revisit issues around the forward transaction contracts and clear them to avoid litigation and considerable damage to the country’s image.

Speaking in separate interviews with THISDAY, the immediate past President, Institute of Chartered Accountants of Nigeria (ICAN), Dr. Innocent Okwuosa, and the Managing Director/Chief Executive Officer of BIC Consultancy Services, Dr. Boniface Chizea, sought an amicable resolution of the issues.

The experts pointed out that forward transactions with the CBN remained irreversible contracts that must be honoured because they are legally binding contracts irrespective of the counterparties that are involved, else there would be loss of confidence in the system.

Okwuosa, who is the 59th President ICAN, said, “First of all, FX forward by its nature is a binding contract between the CBN and the SMEs and corporations in which the CBN enters into binding commitment (an obligation) to deliver FX in the future at an agreed exchange rate.

“Companies and banks can rely on arrangements like this to open letters of credit, import and take delivery of goods and services, and payment to the exporter follows subsequently.

“Consequently, failure to settle the FX forward means the CBN has breached the contract and opens itself up for litigation.”

According to him, “The first implication of the unsettled FX forwards by the CBN is to send a signal to investors in the market that there is a challenge with the country’s ability to honour its trade obligation.

“This is a negative economic signal that could lead to loss of confidence in the market, scaring away foreign investors.”

“For the companies that entered into those FX forward, there would have been a default in meeting the obligation with their trading partners,” which is “a huge reputational damage.”

He said, “The companies could be sued for breach of contract, which could result in incurring litigation costs and heavy penalty in foreign currency.

“This is an unplanned loss. But the more difficult aspect is the disruption in operation as future supply of goods and services may be cut off by the trading partner.”

He pointed out that the consequence would be a “reduction in the level of operation that could lead to loss of employment in the economy as the companies retrench staff to cope with the new realities.”

According to him, the development could also result in “a loss of revenue on the part of the government if you link the import with duties and excise duties paid in case of manufacturing companies.

“But you know the interesting aspect that should be explored is suing the CBN because as I stated FX forward is a binding contract, a breach of which exposes the defaulting party to litigation. This is why I will like to know more about the nature of the CBN’s FX forward contract.”

On his part, Chizea said the issue of the unsettled forwards would do considerable damage to the image of the country as a credible partner to do business with.

He said, “It offends the acceptable norms in bilateral trade relationships. It has direct negative impacts on the growth and development prospects of Nigeria in the years ahead. Even if we can find some facility in the future, which I doubt very much, it will be at punitive rates reflecting the risk we present.

“I think that the first step is to show adequate concern about this predicament by engaging with the organised private sector to fashion an approach that may ameliorate this dilemma, which might include engaging with representatives of the creditors to take them into confidence and may be gain their understanding for an amicable and less costly pass through.

“Therefore, the bottom line is to come true with our creditors to make them appreciate the dilemma we confront.

“Would it at all be possible to explore the refinancing facility option? The dilemma is real. It is thick in the air. You can slash through it with a knife. But the only way forward is to come clean, come down from our high horse to eat the humble pie.”

He, however, observed that the reality is that the country is currently reaping the full consequences of a mismanaged economy over the long haul.

He said, “In the past few years, we lived in denial all in an attempt to buy microeconomic stability, and the chicken has now forcefully come home to roost partly due to damaging miscalculations at reform implementations.”

THISDAY obtained copies of correspondences addressed to both CBN Governor, Mr. Olayemi Cardoso and Minister of Finance and Coordinating Minister for the Economy, Mr. Wale Edun, further indicating efforts on the part of NACCIMA to engage the authorities on behalf of its members over the FX matter.

On March 13, 2024, NACCIMA wrote the Minister of Finance and Coordinating Minister of the Economy, Mr. Olawale Edun

on the “Strategic Imperatives for Redressing Financial Disparities and Augmenting Economic Viability in Nigeria”.

The letter was received the same day by the minister’s office.

The association also wrote Cardoso on June 21, 2024 in a letter titled “Expression of Appreciation for the Meeting on June 19, 2024”. Receipt was acknowledged on June 24, 2024 by the governor’s office.

NACCIMA also received a letter on May 14, 2024 from the House of Representatives Committee on Small and Medium Scale Enterprises, calling for “Memoranda and Invitation to Public Hearing on

Invalidation of $2.4billion Forward Contract Deals by the Central Bank of Nigeria.

None of these interventions by NACCIMA and other stakeholders have yielded the desired outcomes.