Why CBN May Not Clear Forex Backlog -EIU

A report by the Economic Intelligence Unit on Friday questioned the financial capacity of the Central Bank of Nigeria (CBN) to clear $6 billion forex backlogs owed to banks, noting that CBN “lacks the firepower” to perform such activity.

It also claimed the central bank lacked the experience to conduct a foreign currency float leading to a negative outlook for the naira.

Recall that last week, the naira appreciated heavily following reports that the apex bank had begun clearing debts owed to banks.

The apex bank’s Director of Corporate Communications, Dr. Isa AbdulMumin, in a terse message sent to our correspondent confirmed this, noting, “CBN has started off setting the FX forwards backlog.”

But the EIU in its new country report for Nigeria noted 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, stressing that the authorities hadn’t shown enough willingness to implement an orthodox monetary policy to address the issues weighing on the naira, such as severely negative short-term real interest rates.

It added that additional demand in the formal market would be met with constrained supply due to the recent decision to eliminate import limitations on 43 imported commodities.

The report read partly: “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.”

Source: Upshot