Central Bank of Nigeria’s Unsettled FX Backlog Threatens Investor Confidence and Currency Reform

The Central Bank of Nigeria (CBN) is facing a significant challenge with its unsettled foreign exchange (FX) backlog owed to local businesses, which is now having detrimental effects on investor confidence and the success of its latest currency reform measures.

The apex bank previously sold approximately $200 million in FX forward contracts every two weeks. However, as dollar inflows dried up and the demand for dollars surged, the backlog grew exponentially.

The growing concern over the backlog extends beyond Nigerian businesses, including manufacturers and importers who have been waiting in lengthy queues for dollars.

The situation is also eroding foreign investor confidence in the CBN’s recent decision to float the naira as foreign investors, whose involvement in the FX market can significantly impact the success of the CBN’s reform efforts, are perplexed as to why the central bank is unable to utilize its $34 billion external reserves to settle the outstanding contracts.

Estimates suggest that the backlog ranges between $2 billion and $2.5 billion, representing less than 10 percent of the country’s external reserves.  Sources familiar with the situation have revealed that the six-month backlog of forward contracts is severely undermining investor confidence, stating, “Our CBN is the only central bank in the world that defaults on obligations to investors.”

Currency forwards, which are binding contracts in the foreign exchange market, allow for the locking in of exchange rates for future currency transactions. These instruments serve as essential hedging tools, providing stability in uncertain currency markets.

Market insiders have disclosed that clearing the backlog is a top priority for Nigeria’s new administration. However, the pace of resolution has been disappointingly slow for many investors.

This has raised suspicions among some fund managers, with one based in South Africa, who preferred to remain anonymous, stating, “The suspicion is that Nigeria’s external reserves are much less than what the CBN reports. The level of opacity is alarming and is a real drag on investor confidence.”

Nigeria’s external reserves are expected to provide a minimum of seven months’ worth of import cover. Yet, despite having more substantial reserves than other central banks that fulfill their obligations, the CBN continues to default on dollar payments.

The persistence of non-settlement of forward contracts by the CBN is setting a detrimental precedent, according to a senior business leader who has been in the queue for dollars since last year.

They commented, “It used to be inconceivable that the CBN would default on its obligations to the market for protracted periods, but it has become the norm.”

President Bola Tinubu has pledged to thoroughly revamp the monetary policy, leading to the suspension of CBN governor Godwin Emefiele and the implementation of currency floating within just one month. Foreign investors are closely observing how the CBN handles the dollar backlog, as it casts a shadow of doubt over the reforms championed by the new government.