Invalidation Of $2.4bn Forward Contracts By The CBN: Manufacturers' Fate Unknown

Imagine sailing on a calm sea, charts meticulously plotted, course set for prosperity. Suddenly, a colossal wave looms on the horizon, threatening to engulf your vessel and everything you hold dear.

This is the chilling reality facing Nigerian businesses, investors, manufacturers and citizens alike, thanks to the Central Bank of Nigeria's (CBN) recent invalidation of $2.4 billion worth of forward contracts. The governor of the Central Bank of Nigeria, Dr Olayemi Cardoso, during an interview on Arise TV, on the February, 5th 2024 addressed concerns about the recent volatility in the currency market and said that about $2.4bn of the $7bn foreign exchange backlog he met when he got into office were from non-existing entities, requests without import documents among other infractions.

As a financial enthusiast with a keen eye on Nigeria's economic well-being, the recent invalidation of $2.4 billion worth of forward contracts by the Central Bank of Nigeria (CBN) sends chills down my spine. This policy, shrouded in a fog of technicalities and accusations, reeks of inconsistency and recklessness. The CBN claims to have uncovered a "forex trading fraud," but according to Social Integrity Network, (SINET), a non-governmental organisation, representing legitimate businesses unfairly caught in the crossfire, vehemently disputes this narrative. They paint a picture of meticulous planning, with companies securing forward contracts 18 months ago at N450/dollar, only to have the rug pulled from under them today. Now, they face a staggering 333% increase in costs, a financial tsunami that could drown them entirely.

But this isn't just a corporate tragedy; it's a national emergency. Businesses, large and small, are gasping for air. Those who swallowed the bitter pill of borrowing funds at exorbitant rates (some exceeding 30%) to secure these contracts are now drowning in interest payments and potential defaults. Banks, caught between a rock and a hard place, struggle to fulfill their offshore obligations, jeopardizing their own creditworthiness and the nation's financial standing.

The ripple effects are as devastating as they are widespread. The manufacturing sector, already grappling with inflation and a volatile exchange rate, now faces imminent collapse. Nearly 60% of companies have already shut their doors, and this policy threatens to wipe out the remaining 40%. This translates to millions of lost jobs, plummeting production, and a drastic decline in GDP, pushing countless Nigerians deeper into poverty. According to the latest figures from the National Bureau of Statistics, unemployment climbed to a staggering 5.0 per cent in the third quarter of 2023 from 4.2 per cent in the previous quarter and Nigeria’s annual inflation rate rose to 29.90 per cent in January from 28.92 per cent in December 2023. The manufacturing sector, once a pillar of the economy, has witnessed a decline of 15% in production output year-on-year. These alarming statistics paint a grim picture of an economy on the brink.

The industry is currently burdened with the effect of fuel subsidy removal and devaluation of the naira that has led to hyper increase in the cost of production. With the cancellation of forward contracts that has already been utilized for LC establishments, shipment and costing of products already sold by these companies, it would be practically impossible to recover this cost on current production.
This policy will gradually collapse the manufacturing sector, the projected GDP growth rate for the country will collapse and the attendant impact on the microeconomic variables of the Federal Government will be adverse.

This policy isn't just a financial burden on manufacturers; it's a ticking time bomb for everyday Nigerians. Already grappling with rising costs, businesses will be forced into desperate measures to survive, pushing production costs even higher. Imagine the ripple effect: essential goods become out of reach for the average citizen, their basic needs unmet. This simmering frustration could easily boil over into widespread social unrest, destabilizing the very fabric of our nation
But the damage doesn't stop at the water's edge. Failure to honor these contracts could shatter Nigeria's international reputation, branding it as an unreliable and risky investment destination. This, at a time when the government desperately seeks foreign investors, is an act of self-sabotage, undermining years of progress and jeopardizing the nation's future prosperity.

Thankfully, we haven't reached the point where rescue efforts are futile. There's still time to navigate this treacherous storm, but it requires immediate action and a complete course correction. Open communication and transparency are the lifeline we desperately need. The government and CBN must engage with stakeholders to understand the true impact of this policy and explore solutions. A thorough review with clear criteria for identifying genuine transactions, coupled with exploring compensation options for unfairly impacted businesses, is crucial to restoring trust and preventing further economic calamity.

The CBN’s proactive measures to stabilize the foreign exchange market and stimulate economic activities is commendable, I urge the authorities to prioritize long-term economic growth and a fair playing field for legitimate businesses. This isn't just about numbers; it's about the lives and livelihoods of millions of Nigerians. We must act with transparency, fairness, and a commitment to sustainable development. This is not the time for knee-jerk reactions and opaque pronouncements. This is the time for clear communication, collaboration, and decisive action to steer our nation away from the impending economic tsunami. Together, we can build a stronger, more resilient Nigeria, but only if we choose the path of transparency and act with urgency.

In conclusion it is important 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 was utilized for importation such as:

1.Valid Form M approved by the CBN

2. Evidence of establishment and transmission of LC

3. Bill of Lading Documentation

4. 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. The current approach of the CBN is punitive and has far reaching adverse effect on the economy. The CBN must also note that all the forex allocation was legitimately awarded by the apex banks and cannot seek to declare invalid same based on technicalities. The invalidation of $2.4 billion forward contracts by the CBN represents a significant setback for Nigerian manufacturers, further exacerbating the economic crisis gripping the nation. Urgent measures must be taken to address this issue and provide much-needed relief to businesses struggling to survive amidst unprecedented challenges.

Falola Shuaib is a Finance expert writing from Abuja, Nigeria.