CBN to Clear Remaining FX Backlog in Next Few Days

The Governor, Central Bank of Nigeria, Olayemi Cardoso on Thursday during an investor call said that the apex bank will clear all outstanding foreign exchange obligations owed in forward contracts in the next few days as dollars trickle in from the CBN’s most recent attempt to stabilise the naira.

While responding to questions on the current size of the FX backlogs and steps being taken to clear them, he stated that the outstanding backlog was dollars owed to five banks, CBN has cleared its FX backlog in all the banks except five and would do so in the next few days. 

“We are confident that we will shortly be in a position where the whole issue of forwards would be behind us,” Cardoso said.

“I would say in the next few days we should be in a position where the balance of the five (banks) would have been put behind us,” he said.

At the last MPC meeting, the CBN had disclosed that a further $400 million of the outstanding $2.2 billion was recently cleared.

The CBN has received plaudits from foreign investors with its recent reforms to increase market interest rates and allow more transparency with the pricing of the naira against the dollar in the official market.

According to Cardoso, who said Nigeria has attracted $2 billion in foreign portfolio investments this year alone, the reforms are bearing fruit.

“Last year, for example, the total amount of influx from FPI dwindled considerably to over $3 billion and already this year just from the little (reforms) we have done we have attracted $2 billion.

“My point is that with the right policies, right approach, an open and transparent mechanism, inflows will start to come in,” the apex bank governor said.

Inflows are indeed coming in. At $2 billion in the first two months of 2024, Nigeria has managed to attract more than the total foreign portfolio inflows of $1.15 billion it got in the whole of 2023 and about half of total foreign capital inflows of $3.9 billion that year.

The National Bureau of Statistics (NBS) which publishes data on foreign investment inflows is yet to release data on inflows for the first quarter of 2024.

The CBN also reiterated that the naira is undervalued and that the current FX pressures are linked to panic, which is driving hurried monetization of assets.

Cardoso, however, anticipates that the currency will stabilize in the near term, supported by the recent action of the NNPC to move some of its accounts to the CBN.

Banks traded the naira at an average of N1595 per US dollar on Thursday, as the currency appreciated compared to N1609/$ the previous day.

The CBN assured that it will supply and intervene in the FX market whenever there are distortions. The bank last month resumed dollar sales to banks in the spot market after a five-month break and has sold some $300 million since then.

The CBN also guaranteed that it would work to ensure that there is ample liquidity for free entry and exit for foreign portfolio investors. It considered this a priority in the near term.

“We think that the CBN’s recent efforts to restore market confidence and enhance communication with investors are likely to boost the investment case of Nigeria,” analysts at Lagos-based investment bank, CardinalStone said.

“Specifically, efforts to clear the balance of existing backlogs, sanitize the FX ecosystem, and improve carry trade could attract more foreign interest,” the analysts said in a note to clients.

The apex bank also plans to push interest rates higher and has guided to higher stop rates at the upcoming OMO and Treasury Bill auctions.

An OMO auction has been scheduled for Friday, according to the bank.

Cardoso said that the stop rates are expected to edge closer to the MPR which was jacked up by a record 400 basis points to 22.75 percent at the Monetary Policy Committee (MPC) meeting on Tuesday.

The CBN plans to increase OMO frequency and volumes to mop up liquidity and provide investment opportunities for FPIs.

Some N1.5 trillion has been mopped up in the four months that Cardoso has been governor of the CBN. That’s a sign of the CBN’s aggressive liquidity mop up under the new governor who has set his sights on curbing accelerating inflation.

Headline inflation in Nigeria surged 29.9 percent in January, according to data by the NBS. The relentless spike in the prices of goods and services has worsened a cost of living crisis in Africa’s most populous nation and has left investors with negative real return on investment.

The CBN estimates that inflation will moderate in the medium term to 21.4 percent.

Cardoso said that the apex bank has a clear understanding of the drivers of inflation, which includes currency pressures.

The CBN plans to drive policy effectiveness and has indicated that current policies are well thought out. It also noted that corrective measures will be quickly deployed in the event of any wrong policy outcome.

Regarding the recent hike in CRR to 45 percent, the governor said the effective CRR before the increase was about 40 percent with those of a few banks exceeding 45 percent.

“Hence, some banks are going to get refunds under the new CRR regime, while others will be required to make payments,” Cardoso said.

The net effect of the new CRR is about N5.0 trillion (debit to the system). However, the mop-up will be done gradually to avoid causing shock to the financial system.

The investor call with Cardoso was facilitated by the Nigerian Exchange Group, in partnership with sponsors such as international banks and CardinalStone.

In September last year, the Russel FTSE announced its intentions to downgrade Nigeria’s index to ‘unclassified’ due to the rising FX backlogs and the challenges faced by Foreign Portfolio Investors (FPIs) in repatriating their incomes and dividends to their home countries, primarily caused by CBN’s liquidity issues.

Charles Abuede, the chief economist and researcher at Cowry Asset Management Limited said the FX backlogs had led to rating companies downgrading Nigeria’s status in the business community — one of such being MSCI revealing plans to reclassify Nigeria’s indexes from frontier to ‘Standalone’ status by February of 2024 due to the unsettled forex.

March 01, 2024