The Central Bank of Nigeria (CBN) is facing significant challenges with its unsettled foreign exchange backlog owed to local businesses, which is negatively impacting confidence in the latest currency reform and potentially deterring foreign investors from the market. Previously, the CBN used to sell approximately $200 million in FX forward contracts every two weeks. However, as dollar inflows decreased and the demand for dollars increased, a backlog of unsettled contracts emerged.
The concerns over the backlog are not only limited to Nigerian businesses, including manufacturers and importers, who have been waiting in line for dollars. The backlog is also undermining foreign investor confidence in the CBN's decision to float the naira last month. Foreign investors play a crucial role in the FX market, and their hesitation arises from questioning why the CBN is unable to utilize its $34 billion external reserves to resolve the outstanding contracts. Estimated to be between $2 billion and $2.5 billion, the backlog represents less than 10% of the country's external reserves.
The existence of a six-month backlog in forward contracts is eroding investor confidence, as other central banks around the world typically fulfill their obligations to investors. Currency forwards are binding contracts in the foreign exchange market that establish the exchange rate for the future purchase or sale of a currency. They serve as customizable hedging tools.
In summary, the CBN's unresolved foreign exchange backlog is impeding confidence in the currency reform and has the potential to discourage foreign investors from participating in the market.