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CBN’s $2.4bn forward contracts invalidation hits manufacturing

By Grace Chigbu

In a move that reverberates through Nigeria’s economy, the Central Bank of Nigeria (CBN) recently made a decision that could have profound implications. The announcement to invalidate approximately $2.4 billion worth of forward contracts sold to manufacturers has sent shockwaves across the nation, particularly through an already fragile manufacturing sector.


The CBN Governor, in an interview on Arise News Channel, cited several reasons for the invalidation, including issues with valid import documents, non-existent entities receiving allocations, over-allocation of FX, and allocations to entities that did not request them.


This decision comes at a critical time when Nigeria faces daunting economic challenges, with inflation soaring, purchasing power plummeting, and currency devaluation exacerbating the woes of businesses, both large and small.


Manufacturers initially entered into these forward contracts to hedge against currency fluctuations and mitigate exchange rate risks. However, the CBN’s abrupt decision to render these contracts null and void has left them grappling with severe financial consequences.


Over the past year, manufacturers have been burdened with paying naira interest on funds utilized for purchasing these contracts, alongside substantial post-negotiation charges. Despite these financial commitments, many manufacturers find themselves unable to recover their investments due to the contracts maturing amidst a surge in the exchange rate.


The disparity between the exchange rates at the time of contract initiation and the current FX landscape has worsened the financial crisis for these companies. This has led to staggering losses for manufacturers, with some facing losses of billions of naira on previous year transactions.


The repercussions of these invalidated contracts are dire. Small companies, already on the brink of collapse, now face imminent closure, exacerbating unemployment and stifling economic growth. Larger corporations, grappling with mounting forex losses, are contemplating exit strategies, which could further destabilize Nigeria’s investment climate.


The lack of consideration for the economic realities faced by Nigerian manufacturers is concerning. The CBN’s decision to cancel $2.4 billion worth of forward contracts without assessing the impact on the economy or compensating manufacturers for interest costs incurred during the holding period adds insult to injury.


Furthermore, the failure to honor matured forward contracts poses a default risk to the central bank, raising questions about accountability and the fairness of the decision-making process.


The cancellation of these contracts also exacerbates liquidity challenges in the forex market, leading to further devaluation of the naira, increased production costs, and inflation.


As the manufacturing sector grapples with the fallout from this decision, there is a looming threat of higher unemployment rates, as companies may be forced to downsize operations due to increased costs.


It is imperative for the CBN to re-evaluate its policy direction and consider exempting customers with valid export documentation from the list of invalidated forward contracts. This could be achieved through thorough documentation verification to distinguish legitimate business transactions from fraudulent ones.



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