By 
In a startling move that reverberated through Nigeria’s already fragile economy, the Central Bank of Nigeria (CBN) recently declared the invalidation of approximately $2.4 billion worth of forward contracts sold to manufacturers. This decision, with its widespread implications, compounds the challenges faced by the nation, intensifying the struggles of both small and large-scale manufacturers.
CBN Governor, in an interview on Arise News Channel, cited reasons for the invalidation, including the absence of valid import documents, entities with questionable existence receiving allocations, entities receiving more forex than requested, and those obtaining allocations without requesting forex.
The present economic landscape of Nigeria is grim, with businesses grappling with inflation, dwindling purchasing power, and currency devaluation. The nullification of these forward contracts, initially intended to hedge against currency fluctuations and mitigate exchange rate risks, has left manufacturers in dire straits, with severe financial consequences.
Manufacturers, burdened with paying naira interest on funds used to purchase these forward contracts for over a year, face substantial post-negotiation charges. Despite these financial commitments, many find themselves unable to recover their investments due to the forward contracts maturing amid an unprecedented surge in the exchange rate.
The stark difference between the exchange rates at the time of contract initiation and the current FX landscape exacerbates the financial crisis. Companies that engaged in transactions based on exchange rates of N600 to N700 to a dollar now face rates well beyond N1800/$. For example, businesses with invalidated $5,000,000 forward contracts could incur a loss between N5 billion and N6 billion on previous year transactions.
The consequences of these invalidated contracts are catastrophic. Small companies on the brink of collapse now face imminent closure, worsening unemployment and stifling economic growth. Larger corporations, grappling with mounting forex losses, contemplate exit strategies, dealing a severe blow to Nigeria’s investment climate and overall economic stability.
Most concerning is the perceived lack of consideration for the dire economic realities faced by Nigerian manufacturers. The CBN’s decision to cancel $2.4 billion worth of forward contracts without engaging stakeholders to assess the impact is deeply troubling. Furthermore, the failure to compensate manufacturers for interest costs incurred over the past 12 months while their funds were held by the CBN adds insult to injury.
The cancelled forwards, initially used to liquidate foreign obligations, have now disrupted foreign lines availed by correspondent banks. The inability of the CBN to honor matured forward contracts poses a default risk, raising questions about accountability and the bank’s reversal of its own approvals.
As a result of this decision, the forex market, already lacking sufficient liquidity, faces increased demand of a potential $2.4 billion, further devaluing the Naira, escalating production costs, and causing inflation. The policy’s impact on the manufacturing sector, forcing increased borrowing, higher finance costs, and potential downsizing, is disastrous.
The CBN must reevaluate its policy direction, exempting customers with valid export documentation from invalid forward contracts. Requesting proof of fund utilization for importation, such as approved Form M, LC establishment evidence, bill of lading documentation, and Custom Duty payments, can help distinguish legitimate businesses from those who may have misused allocated forex.
The current punitive approach by the CBN has far-reaching adverse effects on the economy, and urgent intervention is necessary to provide relief to struggling businesses. The Senate President, Senator Godwill Akpabio, President Bola Tinubu, and concerned Nigerians are urged to intervene in this matter. Immediate measures are crucial to address this setback and prevent further economic deterioration.
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