CBN and its weird fx forward trade By Nnaemeka Obiaraeri

The other day, I did a write-up on the absurd and deceitful reversal of the pledge by the Central Bank of Nigeria to offset the whole backlog of LC obligations of customers of deposit money banks in Nigeria at the old official window rate of N199/$1.

Today, I am following up with a review of another weird absurdity as it applies to the FX forward policy as enshrined in the new CBN FX regime guidelines. The CBN on Tuesday gleefully announced to the world that it had cleared the backlog of accumulated LC obligations in the banking system, valued at over $5bn through a combination of spot and forward FX sales. Not unexpectedly, a majority of gullible Nigerians clapped away not bothering to ascertain how it performed this magic and under what terms and conditions.

In my candid opinion, what the CBN did in its purported clearing of these backlogs was simply to execute the death warrant of many companies and few banks in Nigeria. Soon, we shall begin to see these companies drop dead one after another or in mass, if the CBN does not reverse this queer implementation of a well-thought out policy crafted for it, albeit with some hidden intentions to profiteer by the leadership of the FMDQ OTC. (I will address the FMDQ OTC/FMDA angle to this on a later date).

To aid our understanding, I will like us to firstly understand what a forward FX contract is.

A forward FX contract is a customised contract between two parties (in this case, the CBN (seller) and the deposit money banks on behalf of their customers (buyers)) to buy and sell foreign currency, to be delivered to the buyers at a specified price on a future date. This forward contracts are over-the-counter instruments.

Under the new CBN Forward FX model, banks were asked to request from their customers to send in applications/bids to liquidate their outstanding LC obligations. Recall that a majority of these customers, who participated in legitimate CBN approved transactions, have accumulated naira equivalent of their LC obligations in their collection account at the old official window rate of N199/$ and waited for months for the CBN to allocate dollars to them. Some of them borrowed the funds in naira to fund their transactions. Thus, they have kept their monies sterilised in collection accounts in the banks at zero interest income, (some date back to October 2015. I mean zero income on hundreds of billions of naira). Yet, the fee/interests charges on their naira loans and dollar LC obligations continue to run unhindered/non-sterilised. So, whatever incomes they made from whatever transactions they did have almost been eroded/wiped out by bank charges local and offshore.

Under a conventional FX forward contract, the buyer and seller agrees on the pricing, delivery date and default risk hedging mechanisms of the contract to be consummated at a date in the future. Visible/actual transfer of considerations (currencies) based on the terms and conditions of the contract are done on the agreed date in the future.

But under the new CBN FX forward contract model, the CBN gave the bank treasurers the range of bid rates that they should expect their customers to submit. Now, wait for the most bizarre aspect of this scheme, these costumers were asked to send in bids ranging from N250 to N285 for a dollar to offset obligations that were consummated at N199/$.

Now Messrs Lagbaja PLC, whose outstanding LC obligation as of June 20, 2016 stood at $12m (with accumulated naira amount of N2.38bn) was asked by the CBN through the Treasurers of Rent Seekers Bank PLC, to bid for the liquidation of his outstanding LC obligation at N260 per dollar. Since Messrs Lagbaja PLC has already accumulated his naira in the collection account at the officials rare of N199/$ (i.e. N2.38bn) but must liquidate the obligations to save the local bank, the bank had to create an overdraft facility for him to augment the balance. So, to be able to bid at N260/$, Messrs Lagbaja had to take an unplanned/ unanticipated loan of N732m to make up the deficit.

This loan was booked at 21 per cent interest rate and two per cent flat fee on facility amounts (additional hole in his books). Now, at the end of the bid exercise, the Treasurers of Rent Seekers Bank PLC announced to Messrs Lagbaja PLC that his FX bid was cleared at a forward FX rate of N260/$ to be delivered to his creditors in India on August 30, 2016. (Two months from now). He was also told that to hedge against default risk, that his accumulated naira funds of N2.38bn plus borrowed N732m totalling N3.11bn has been transferred to the CBN. So, for the next two months, Messrs Lagbaja PLC naira will be sterilised at the CBN at zero interest income, not utilised by it for any business. Yet, its interest and fee obligations to both the local bank and the LC obligations continue to run. Na wah oooo.

What manner of FX forward contract is this? Who designed this? Who is driving its implementation? If the CBN is very concerned about the default risk of the domestic banks or their customers in defaulting to deliver their naira at the delivery rate within the next two months, why not take their naira and pay them Treasury bill rate to help them offset even a minute part of the credit costs burden already suffocating them?

I am really bemused and bewildered that some of the experts/industry players, who should know better, who had joined me to hail this new FX policy regime, are not smelling the poisonous stench of its very poor implementations.

Please, someone high up there should help me plead with these people at the CBN not to bury this already comatose economy. I am worried. Deeply worried at the bubble that will burst soon, if the authorities at the CBN do not rejig their implementation work plan. If they don’t, Messrs Lagbaja PLC may abandon the naira hole at Rent Seekers Bank PLC, close shop and retrench massively. Many other firms in the same league will follow suit and the banks will have their portfolio of bad debts trending up in the upper region of the N2tn mark. Most of these banks are already in deep hole. Don’t mind the outward facade. A word is enough for the wise.