Invalidation Of $2.4bn Forward Contract Deals: Matters Arising

The Central Bank of Nigeria (CBN), in what seems to be a desperate move to manage an economy in crisis has, since the coming into office of President Bola Ahmed Tinubu, put in place some policy measures which, on the face value, are well-intentioned.
Starting from the floating of the national currency that has seen the Naira plummet in value and the raising of customs exchange rate, the bank is, unwittingly, inflicting pain not just on businesses that are facing an unprecedented rise in operational costs but also on Nigerians who bear the brunt of these harsh policies.

Recently, the CBN announced the invalidation of approximately $2.4 billion worth of forward contracts sold to manufacturers. According to the apex bank, this decision was informed by the discovery that the affected businesses failed to fulfill certain conditions. It claimed that the businesses either did not have valid import documents or the entities did not exist and got allocations anyway. The CBN also said that the entities that asked for foreign exchange, got more than what they asked for while others that did not ask got allocations also.

Expectedly, this decision 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.
By CBN records, 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 apex bank’s decision to render these contracts null and void has left these manufacturers in dire straits, with devastating financial implications.
Interestingly, in our view, for over a year, manufacturers have been saddled with the burden of paying Naira interest on the funds utilized to purchase the forward contracts which was compounded by substantial post-negotiation charges.

Sadly, and despite these hefty financial commitments, many manufacturers have been unable to recoup their investments as the forward contracts matured amidst an unprecedented surge in the exchange rate.
Analysts posit that the repercussions of the invalidated forward contracts are dire as small companies now face imminent closure. On their part, larger corporations, faced with mounting foreign exchange losses, are contemplating exit strategies.

As a newspaper, we are concerned that the CBN’s decision to cancel $2.4 billion worth of forward contracts was carried out, supposedly, without engaging stakeholders to assess the impact on an already beleaguered economy. Even more disconcerting, in our view, is the realization that it did not consider it part of the deal to compensate manufacturers for the interest costs incurred over the past 12 months while their funds were held by it.

From all indications, the delivery of the forward contracts was expected to be utilized by the banks to liquidate the foreign obligation on their correspondent banks. These lines were utilized for valid Letters of Credit (LC) transactions, approved by the CBN and shipments received by the customers in Nigeria.
But with the cancellation of the forwards, the implication is that the foreign lines availed by the correspondent banks will be clogged and classified as bad debt due to the tenors fallen after 180 days of establishment.

This inability of the CBN to honor matured forward contracts, experts say, constitutes a default risk to the apex bank thereby raising the question as to how the manufacturers intend to hold CBN accountable for failing to honor contractual agreements for valid transactions approved by them which they declared invalid transaction.

Curiously, and as part of this transaction, there is what is called customer deposits for forex transaction during which customers’ accounts were debited with the Naira equivalent of the allocated United States dollar for the transactions. This newspaper was reliably informed that these funds have been deposited with the CBN for over a year. There is, therefore, a demand that 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.
We were, also, reliably informed that there was a re-allocation letter from CBN in which the bank gave approval for the re-allocation of the excess forex for other valid transactions These approved transactions by the CBN, in our considered opinion, is expected to be honored as the customers have complied with the laid down procedures for handling such matters.

Another implication of this decision, in our opinion, is that it will impact negatively on the illiquid forex market. This will further devalue the Naira, increase cost of production and inflation within the country.
Furthermore, the exchange rate differentials effect of this policy is presumed to be disastrous to the manufacturing sector.
Fundamentally, 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.
As a newspaper, we are disturbed by the impact of this policy on the economy. Without doubt, it will exacerbate the unemployment situation, may result in the collapse of the manufacturing sector, lead to a decline in the nation’s Gross Domestic Product (GDP) and worsen the poverty level in the country.

A way out of this seeming quagmire, in our opinion, is 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 were 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 will help the CBN separate genuine customers that have utilized the forex allocation for legitimate business from those who may have diverted the forex for other uses.