In recent months, Nigeria has faced mounting economic challenges, including a substantial backlog of unpaid foreign exchange (FX) obligations and waning investor confidence. However, the tide appears to be turning with the Central Bank of Nigeria's (CBN) decisive move to begin settling these long-overdue FX commitments.
The CBN’s commitment to clearing this backlog, estimated to total around $7 billion, has been eagerly anticipated by banks, businesses, and the wider Nigerian public. By finally honouring these obligations, some dating back as far as March 2022, the CBN has taken a momentous step toward restoring stability and optimism in the Nigerian economy.
In this in-depth analysis, we will explore the origins and impacts of Nigeria’s FX backlog, the CBN’s crucial decision to prioritize its settlement, and what this development means for Nigeria’s economic outlook going forward.
The Origins and Impacts of the FX Backlog
Nigeria’s FX backlog has its roots in the foreign currency liquidity crisis that emerged during the COVID-19 pandemic. With oil prices and production plummeting in 2020, Nigeria saw its FX earnings drop dramatically even as demand rose.
To manage its dwindling FX reserves, the CBN restricted access to dollars for certain types of transactions. However, the CBN continued to promise forward contracts to international institutions and companies needing dollars, agreeing to deliver the currency at some future date.
With oil revenues still depressed, the promised dollars never materialized, and the backlog of unfulfilled FX contracts swelled. By October 2022, the CBN owed nearly $2 billion just to foreign airlines operating in Nigeria, forcing some carriers to threaten suspending flights.
The swelling FX backlog has had wide-ranging impacts on Nigeria’s economy:
- Loss of investor confidence. With the CBN unable to deliver contracted dollars, investors became wary of bringing new money into Nigeria.
- Pressure on the Naira. The shortage of dollars put downward pressure on the Naira as demand exceeded supply. The Naira fell from around 410 to the dollar to as low as 850 in September 2022.
- High inflation. Importers paying higher Naira prices for scarce dollars passed those costs to consumers. Nigeria’s inflation rate rose over 20% in September 2022.
- Company failures. Some companies dependent on imported inputs were forced to suspend operations as they could not access dollars to pay suppliers.
- Job losses. With companies closing their doors, thousands of jobs were lost, especially in manufacturing.
- Capital flight. Foreign investors moved capital out of Naira assets as trust in Nigeria's economy dissolved.
By late 2022, the FX backlog had created a crisis of confidence in the Nigerian economy. Businesses could not access the inputs they needed, inflation was eroding consumer purchasing power, and investors were fleeing the country. Urgent action was required to clear the backlog and restore stability.
CBN Prioritizes Settling FX Backlog to Restore Confidence
In recent weeks, Nigeria’s new government has made resolving the FX backlog a top priority. During his October 2022 inauguration ceremony, President Muhammadu Buhari highlighted the hardship created by the FX shortage and the importance of clearing owed obligations.
President Bola Tinubu echoed these sentiments at the 29th Nigerian Economic Summit in November 2022, stating “The government will honour all foreign exchange future contracts.”
The CBN has heeded these calls from Nigeria’s leadership to remedy the crisis. As confirmed by multiple sources, the CBN has begun making good on the president's promise, paying out hundreds of millions in FX contracts owed to several banks.
Citibank, Stanbic IBTC, Standard Chartered, and other banks have reportedly received long-awaited FX payments from the CBN. These payouts are said to be just the first phase of a broader push to clear more of the backlog.
In parallel, Nigeria is expecting a flood of new FX inflows according to Minister of Finance, Budget and National Planning Zainab Ahmed. She cited anticipated increases in oil production, lower fuel subsidy costs, investments by sovereign wealth funds, and other sources that could provide around $10 billion in fresh FX.
Experts laud the prioritization of the FX backlog as a major step toward restoring investor confidence and stabilizing the Naira. After significant delay, the CBN finally appears committed to honoring the foreign currency obligations that have immersed Nigeria in crisis.
Impacts on the Economy as Backlog Clears
Resolving the FX backlog will produce a cascade of positive outcomes for Nigeria's economy:
- Naira appreciation. As FX flows resume, the overloaded demand will ease, allowing the Naira exchange rate to strengthen.
- Lower inflation. With fewer Naira needed to buy dollars, imported input costs will fall, helping curb inflation.
- Increased manufacturing and services. Companies will restart operations as they regain access to the dollar inputs needed for production.
- Job creation. As shuttered businesses reopen, thousands of new jobs will be created, bolstering incomes.
- Poverty reduction. The economic expansion facilitated by resolving the FX shortage will create jobs and incomes for Nigeria's poorest citizens.
- New foreign investment. Clearing the backlog removes a major impediment to investment, allowing new foreign capital to flow into Nigeria.
- GDP growth. Economic productivity supported by the influx of FX and new investment will spur faster GDP growth for Nigeria.
While the CBN's efforts to resolve the FX backlog are still in early stages, the initial impacts are expected to compound quickly as confidence and stability return. If the CBN maintains its commitment to fully clearing these obligations, Nigeria's economy could enter a new era of reduced inflation, a stronger Naira, enhanced job creation, and renewed foreign investment inflows.
After years of crisis, Nigeria finally appears to be on the path toward unlocking its immense economic potential.
Risks and Challenges That Remain
Despite the optimism spurred by the CBN’s recent FX disbursements, Nigeria still faces risks and challenges on the path toward full economic stability.
Firstly, oil revenue remains volatile. If prices or production fall again, the influx of FX could slow or reverse, undermining progress. Nigeria must continue diversifying its foreign revenue sources beyond oil dependency.
Secondly, clearing the $7 billion backlog will be a marathon, not a sprint. The CBN must carefully manage FX reserves and not exhaust them paying back debts. A prudent, gradual approach is required.
Thirdly, consistently meeting new FX demands remains crucial. The CBN cannot slide back into a growing backlog once old debts are cleared. Policies encouraging exports over imports may be warranted to boost net FX supply.
Lastly, reducing corruption and leakages will ensure Nigeria derives maximum benefit from its FX inflows. Government officials must be held accountable to avoid wastage of the hard-earned dollars entering the economy.
While risks remain, the policy actions taken thus far indicate that Nigeria is serious about changing its economic trajectory after years of instability.
My Final Word
Through years of depressed oil revenues, the CBN made critical missteps in over-extending its FX forward obligations. Yet, hope has emerged as the CBN begins to deliver on these promises.
Clearing the FX backlog lifts the single greatest roadblock retarding investment and growth in Africa’s largest economy. As dollars once again flow, confidence and stability will follow, translating into reduced inflation, job creation, and rising prosperity for Nigerians.
By decisively honouring its commitments, the CBN has set the stage for Nigeria to unlock its immense potential. While more work remains, the progress made thus far represents a pivotal turnaround in Nigeria's economic story.