The Central Bank of Nigeria (CBN) is reportedly collaborating with commercial banks to clear the nation’s $10 billion foreign exchange backlog within the next two weeks.
The move comes amid the foreign exchange crisis that has seen Nigeria default on many of its international financial obligations, particularly the repatriation of revenues for multinationals operating in the country.
The FX obligations have piled up over time, reaching an estimated $10 billion and compounding the challenge of attracting Foreign Direct Investment (FDI) and Portfolio Direct Investment (PDI).
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The central bank’s move to clear the backlog was reportedly disclosed by the acting governor, Folashodun Shonubi. He shared this update at a forum held on Tuesday in Lagos, during a discussion about the ongoing issues in the foreign exchange market.
According to him, the clearance of these backlogs would be accomplished through various mechanisms within the forex market. He said that banks, which have been responsible for 75% of forex transactions, will play crucial roles in ensuring the successful clearance of the backlog.
“As a matter of fact, there is a large amount of the obligations that the banks in Nigeria have already taken on. So, what happened was that at maturity, they made the foreign exchange available for those who needed to use them like importers and what have you.
“There are some customers who still have their obligations and part of the restructuring with the banks in Nigeria, is also to clear that backlog. That is something we have been discussing for a while. I expect that we will do that, within the next one or two weeks.
“What that means, therefore, is that this obligation that people keep on talking about will not be left. Today, we still intervene in the market, so it is not as if it has affected our ability to make monies available to banks in the Investors and Exporters foreign exchange market,” Shonubi said.
Nigeria’s unmet FX demand has created chaos in its business ecosystem, leaving a huge vacuum that needs to be urgently filled with significant dollar liquidity.
Last year, Emirates Airlines suspended its operation in Nigeria due to its failure to repatriate nearly $90 million of its revenue. The fund is part of millions of dollars belonging to multinationals trapped in the country due to dollar scarcity.
The $10 billion backlog originates from unfulfilled foreign exchange demands from various sectors, including investors and exporters, manufacturers, importers procuring raw materials from overseas, parents funding their children’s tuition fees abroad, Nigerians covering medical expenses abroad, and travelers obtaining Business Travel Allowances (BTAs) and Personal Travel Allowances (PTA) since 2015.
In June, the central bank announced a move to eliminate multiple exchange rates by removing control pegs around the dollar. The decision has seen the naira plunge below N920 per dollar in the parallel market, and around N744 in the Investor & Exporter window now known as the Nigerian Foreign Exchange Market (NFEM).
The apex bank has failed to effect a convergence since then, despite new policies targeting the unification of exchange rates. This backdrop has been attributed to FX illiquidity at the banks, forcing people in need of dollars to the parallel market and thereby widening the exchange rate gap between the two FX sources.
Shonubi pointed out that the CBN’s contribution to the FX market is less than 25%, and he emphasized that the significance and extent of the apex bank’s intervention in the market are sometimes overstated, especially when considering the volume of forex interventions.
“When we look at the volumes, the Central Bank of Nigeria today contributes less than 25% into the forex market. And the aim if you remember about a year and a half ago, was that the Central Bank did not want to be a regular player, but more of intervening to stabilize the rates and that is where we are going,’’ he said.
The CBN had earlier accused banks of diverting FX inflow from diaspora remittances to the parallel market, compounding the illiquidity in the I & E window.
Shonubi did not give details of how the CBN will achieve its aim to clear the $10 billion backlog in two weeks but disclosed that the banks have times three, access to more FX than the CBN.
“There is so much more foreign exchange that people don’t talk about, that is being made available through the banking system and banks are selling to their customers. It doesn’t come to the Central Bank, it doesn’t appear as part of the demand that comes to us. And it is significant. It is almost three times what we as a Central Bank make available.’’
Analysts say the move, if successful, will significantly boost naira’s performance in the FX market.