CBN Begins Clearing of $2bn Forex Backlog


By Obinna Chima

In line with its earlier promise to foreign portfolio investors (FPIs), the Central Bank of Nigeria (CBN) has started the sale of foreign exchange (FX) to banks to clear the backlog of demand in the market, which currently stands at $2 billion.

THISDAY gathered that the apex bank is utilising the strategy of a combination of spot and 150-day forward sales to clear the accumulated FX demand.

The exercise, which commenced on Monday, has seen the bank selling $25 million daily and would continue weekly until the backlog is cleared, a source told THISDAY.

“As it is now, all the foreign portfolio investors are relaxed because of the intervention by the apex bank. They (CBN) have promised us that it would be weekly until everything is cleared,” a source told THISDAY.

CBN Director, Corporate Communications, Mr. Isaac Okoroafor, who confirmed the clearance, said: “We have always said that once we understand the depth of the situation fully, we would start intervening. So, we have started clearing the FX backlog.”
THISDAY also gathered that in order to stimulate FX liquidity, CBN has also been intervening at the Investors and Exporters’ (I&E) window, where on Tuesday it sold $5 million and also sold the same amount of FX on the window yesterday.

The Chief Executive Officer, FMDQ Group, Mr. Bola Onadele; the co-founder of Cardinal Stone Partners Limited, a Lagos-based investment firm, Mr. Mohammed Garuba; and the Managing Director of Afrinvest Securities Limited, Mr. Ayodeji Ebo, all confirmed the development in separate interviews with THISDAY.

Garuba said: “I can confirm to you that the CBN started clearing the backlog on Monday, August 31.
“It was a big shock to the market and a very pleasant surprise. On Monday, CBN supplied just $10 million, Tuesday it did $25 million and another $25 million today (Wednesday).

“The one they did on Monday gave CBN clarity on the total outstanding demand. So, the bank was able to get the total volume and demand. Now, CBN knows the amount of backlog and now has full clarity on accumulated demand to date.”

According to him, the fact that CBN has started clearing the FX backlog is giving confidence to the market.

“Most of these monies would not come back because interest rates are too low to attract them back. So, why waste money when you know the person would not come back? CBN is not interested in increasing interest rates aggressively to destroy the economy,” he said.
However, the Cardinal Stone boss anticipated that the stock market might record some depreciation in the short-term because of the development.

“But I believe that this strategy adopted by CBN might make sense because the FPIs come in and hit you when you least expected. If we would see FPIs come into the country again, they would be honest, long-term investors who are coming to seek good returns and I think that message has been passed.

“CBN kept to its words. It had said there would be an orderly clearance of the FX backlog and luckily they have lived up to that expectation. They shocked the market by doing this when we least expected. So, I think they are also doing this ahead of the World Bank funds and this is a show of confidence,” Garuba added.

Onadele stated that the outbreak of the COVID-19 brought about a collapse in crude oil price, which went as low as $10, and led to dislocation in the FX market.

According to him, whenever there’s market dislocation, the regulator easily would think of how to stabilise the system to ensure that there is no collapse.

“So, what CBN did was to take control of the market. Now that the apex bank has seen that there is stability in crude oil price, which we know has a high correlation with the FX market in Nigeria, CBN has started taking action.

“The first one is to clear the backlog. What has happened is that when CBN took control of the market, it couldn’t satisfy all the demand. So, CBN has commenced sales to the corporates, selling spot and forward,” he added.

According to him, the development has calmed the market and strengthened investors’ confidence.
Onadele said: “Since this pandemic started, we must acknowledge that CBN kept the futures market and guaranteed the rates, and that is commendable.

“You have also seen that in the retail market, the apex bank has also supported that market and you can see that the parallel market rate is dropping. In actual fact, a lot of people that had been sitting on dollar position are now selling.

“The expectation is that the banks would also support the market liquidity by selling. So, the more everyone sells, the naira would continue to strengthen. All the other markets would benefit if the FX market ramps up again and so we should continue to support the central bank.”