The controversial $2.4 billion backlog has analysts warning the Central Bank of Nigeria (CBN) to exercise caution in managing it, as eliminating the remaining backlog may encourage foreign investors to enter the nation even more.
The actions made by the CBN to resolve FX difficulties have received support from the Bank Directors Association of Nigeria (BDAN), which stated that doing so will guarantee stability and resilience in the banking sector.
In an interview with Arise News, CBN governor Dr. Olayemi Cardoso stated that he had encountered over $7 billion in outstanding debt, of which $2.4 billion could not be supported by formal documentation.
Cardoso stated that $2.4 billion is still debatable even if the top bank has cleared $2.3 billion of the backlog, leaving $2.2 billion unpaid.
In addition, Cardoso stated that the bank has written to authorized dealers to explain the discrepancies found, “and sadly, quite frankly, I think much of those have not been disputed to our satisfaction.” Cardoso insisted that CBN will not pay for foreign exchange requests that were not legitimately initiated.
Agusto & Co.’s Head of Financial Institutions Ratings, Ayokunle Olubunmi, commented on this event, saying: “On the controversial $2.4 billion, how the CBN manages that is very important.” Although the airline backlog has been cleared, the airlines continue to claim that they owe approximately $600 million.
One of the most essential things the CBN has to do right now is figure out how to repair its reputation as a reliable organization and win back the trust of investors. How it handles and engages with those guys to settle the dispute is crucial. Other investors may be reluctant to join in if this is not handled properly and those folks keep leaking the word abroad. It is therefore a highly delicate position that they must handle.
Dr. Muda Yusuf, CEO of the Center for the Promotion of Private Enterprise (CPPE), expressed his own perspective, saying that the CBN is in a better position to identify which transactions are legitimate and which ones are not. If a forensic audit was conducted and these numbers were obtained, then that is what they are and this is a step in the process of tidying the area. Additionally, he guaranteed that the entire backlog would be removed shortly.
“After that is finished, I’m confident that the level of confidence in the market will start to increase because the CBN’s ability to directly intervene in the market has been slowed down and diminished by interventions and backlog clearing. Once the backlog is cleared, however, the CBN’s ability to directly intervene in the market will improve, which will help to improve and enhance liquidity in the forex market.”
It is “reassuring that they have not only started clearing the backlog but that they have gone that far,” according to Agusto’s Olubunmi, who spoke about the backlog cleaning.
He states that “one third of the original amount has been cleared, one third is still owed, and one third is contentious.” It’s great that they took the initiative to accomplish that.
“He may be aware of this, but he also failed to mention that there is still some pent-up demand. Investors who need money and those who want to exit the market haven’t actually shown up because of the market’s illiquidity, so he shouldn’t be shocked that even after clearing up all of this mess, there will still be some enormous amount that want to go out.
I’m hoping they’re keeping that in the back of their minds as well.
In the meantime, the country’s banks have been advised by BDAN to follow the CBN’s FX guidelines.
In a statement released and signed by its chairman, Mustafa Chike-Obi, BDAN stated that it “wholeheartedly supports these comprehensive measures which underscore the commitment of the CBN” at strengthening the country’s financial system after evaluating the most recent guidelines and circulars issued by the apex bank.
Concerns about banks’ increasing exposure to foreign exchange through Net Open Positions (NOP) led to CBN issuing directives stating that the total foreign exchange assets and liabilities of NOPs could not exceed 20 percent short or 0 percent long of shareholders’ funds.
According to Chike-Obi, “this directive plays a critical role in ensuring the effective management of foreign currency exposures, along with other prudential requirements outlined in the circular.” By putting these restrictions in place, the CBN hopes to reduce any losses that would cause serious systemic problems.
“The financial industry’s efforts to improve risk management, accountability, and openness are exemplified by these regulatory actions. The Central Bank of Nigeria has been commended by the Bank Directors Association of Nigeria (BDAN) for its proactive approach in protecting the interests of investors, depositors, and the country’s general economic health.
“BDAN sees these regulations as a step in the right direction toward building a stable financial environment and averting negative consequences for the banking industry. The Association continues to support programs that advance the stability and prosperity of the Nigerian economy and commends the CBN for its dedication to proactive regulation.
As a result, the Association exhorts all Banks to adhere to the new guidelines in their entirety and to actively engage in the implementation process in order to do so. In addition, the Association recognizes the careful work done by the Central Bank of Nigeria in conferring with experts and stakeholders to guarantee a sensible and efficient regulatory strategy.
As proponents of ethical behavior and responsible banking, BDAN is confident that these guidelines will have a major positive impact on the long-term viability and expansion of the banking industry as well as its general effectiveness, stability, and transparency, all of which will eventually aid in the development of the country’s economy.
“BDAN commits to working in tandem with the Nigerian Central Bank and other key players to maintain a robust and dynamic financial system that advances the welfare of all Nigerians. We wholeheartedly endorse these initiatives because we think they are a good first step toward making the banking system more effective.