Some dollars

By Nume Ekeghe with agency report

The Central Bank of Nigeria’s (CBN’s) restrictions on the flow of dollars to domestic lenders is forcing them to delay hard currency loan and trade repayments to foreign banks and increasing the risk of default, bankers said.

Reeling from the slump in oil prices, the central bank began last year to impose ever stricter dollar curbs to conserve its reserves, which stood at $27.82 billion on March 1, their lowest level in more than 11 years.

Now, banks seeking dollars to repay letters of credit (LCs) to foreign banks have to submit bids to the central bank, imposing extra barriers to hard currency access – to the consternation of foreign institutions, Reuters reported.

Previously, the delays have only been for a day or two, and have not been a cause for alarm for the international lenders. But now, repayment delays have swelled to over a week in some cases, bankers say.

“We have had delays for almost a year,” one senior Nigerian banker, who asked not to be named, told Reuters. “But we have capacity to pay what we owe. The delays are understood by both parties to be due to exchange controls.”

Banking sources estimate outstanding LCs at $500 million.

The central bank has rationed dollars since oil prices began to fall, selling around $250 million a week, according to bankers. This is half what it used to sell when oil prices were high, making sourcing dollars to repay matured LCs a headache.

The central bank met commercial lenders last week to assure them it would sell them foreign currency to repay foreign loans, but told them they needed to pay off matured LCs first before negotiating new ones to prevent a backlog building up, bankers said. If the amount of delayed repayments gets too big, bankers fear it might become impossible for the central bank to meet dollar demand, which would push the situation from a liquidity crunch to a credit crunch – and ultimately even a default.

“If we have a credit default due to the currency controls, it will affect the entire country and worsen the country risk profile,” another banker said.
Oil revenues have historically accounted for 70 per cent of Nigerian government income and 90 per cent of its foreign exchange. The oil price collapse has whacked public finances and the currency, which trades on the black market at almost half its official value.

President Muhammadu Buhari has rejected calls to devalue the naira, even though banks are being squeezed harder every day.

Loan growth ground to a halt last year after a 32.5 per cent jump in 2014 as the banks’ main clients in the oil sector halted projects or were unable to service loans.

“We will see non-performing loans rise to around 10 percent in 2016 moderated by restructuring and write-offs,”a sub-Saharan Africa banking analyst at Moody’s, Akin Majekodunmi said.

Bad loans had risen above five per cent at the end of 2015, up from 4.7 per cent as of June 2015, he estimated.

Meanwhile, Nigeria’s overnight interbank lending rate rose week-on-week to an average of 3.5 per cent last Friday, up from one per cent the preceding week, after central bank sales of treasury bills and deposits for dollar purchases drained liquidity in the banking system.

Nigeria raised N329.93 billion ($1.66 billion) worth of three-month to one-year treasury bills at an auction last Wednesday with higher returns than in its previous auction.

The central bank also directed commercial lenders last Tuesday to pay for their dollar purchases 48 hours in advance of its Thursday intervention in the official interbank forex market. This step also drained cash from the system and led to a hike in the cost of borrowing among banks.

The central bank usually intervenes once a week in the official interbank foreign exchange market to provide dollars for eligible importers, while it requires commercial lenders to fund its naira account 48 hours ahead of the intervention. Traders said the central bank offered N50 billion in open market operation (OMO) treasury bills on Friday, but the result of the auction was yet to be released.

The total commercial lenders’ credit balance with the central bank stood at N439 billion on Thursday compared with N591.76 billion last Friday.

Traders said banking system liquidity was expected to decrease further after additional cash outflows to OMO bill purchases and cash reserves requirements are debited from commercial lenders’ accounts.

“The cost of borrowing is expected to spike further on Monday if the central bank sells more treasury bills than it offered at the OMO auction today (Friday) and the CRR debit is reflected in the banking system debt balance,” one trader told Reuters. The interbank rate reflects the level of naira cash liquidity in the banking system.