CBN May Not Clear Forex Backlog - Reports

In a report by the Economist Intelligence Unit on Friday, it questioned the financial capacity of the central bank to clear $6 billion forex backlogs owed to banks, pointing out the that CBN “lacks the firepower” to perform such activity.

It was recall that last week, the naira appreciated heavily due to reports that the apex bank had begun clearing debts owed to banks. The apex bank’s Director of Corporate Communications, Isa AbdulMumin, in a terse message delivered to a correspondent confirmed this, noting, “CBN has started off setting the fx forwards backlog.”

However, the EIU in its new country report for Nigeria explained that there would be continued currency losses due to the large size of the parallel market and the low foreign exchange reserve of the country, noting that the authorities haven’t shown enough willingness to implement an orthodox monetary policy to tackle the issues weighing on the naira, such as severely negative short-term real interest rates.

According to the report, “An unsupportive monetary policy implies that the naira will remain under pressure, and the CBN lacks the firepower to adequately supply the market or clear a backlog of foreign exchange orders, valued at over US$6bn, which will keep foreign investors unnerved.

“Official foreign reserves are reported at US$33bn, but up to one-third of the assets are encumbered, tied up in derivative contracts or loans. In the short to medium term, the official exchange rate will continue to be propped up by access restrictions, implying long lead times at the NFEM.

“However, we do not expect lasting commitment to a market-led naira, as the CBN lacks experience in conducting monetary policy under a float. High inflation and a continued spread with the parallel market will leave the exchange-rate regime unstable and result in periodic devaluations."