Analyzing the impact: CBN’s Backlog Clearance on the FX Market
Clear skies or stormy weather? CBN’s backlog clearance sets the scene for a fascinating journey ahead in the FX market.
What’s the FX Backlog
The FX backlog represents liabilities for the CBN held by various companies.
In simpler terms, amount owed, debts.
The accumulation of this backlog is from conducting international transactions without promptly settling the involved parties, leading to a continuous increase in liabilities. Clearing the backlog ensures that all parties involved, both domestic and foreign creditors, have been settled.
Does this affect our foreign reserves? *nods in silence
The clearance of operational FX liabilities restores trust, credibility, and confidence in conducting transactions.
This also frees up the reserves to address more pressing matters, such as intervening in the FX market to influence exchange rates and aid importation of essential commodities.
Say you’re abroad and want to bring foreign currency into Nigeria for transactions, you are assured that your funds will be handled smoothly. This assurance not only increases confidence among foreign investors but also creates an environment conducive for sourcing FX funding through international loan and others.
“Is it a guarantee for temporary fix?
No! It only buys time to fix the major driver of the FX crisis and inflation in the country.”
By what means does the CBN obtain the dollars required to clear the backlog?
If you ask me, who do you want me to ask?
Although, recent data shows an improvement in remittances and foreign portfolio inflows, which might be due to the issue of treasury bills totaling more than N2 trillion. The foreign reserves exceed $33 billion, as opposed to over $36 billion in prior year, still reflecting high demand pressure and low capital inflows.
Just like getting back with your favorite ex, this sounds nice, everyone will adjust accordingly but to be honest, is there still trust?
👀
There’s also an unresolved over $2 billion backlog that demands urgent resolution, speculations suggest that airline funds are trapped in this backlog, explaining why airline companies are voicing concerns about unsettled transactions.
“As we went along repaying the FX backlog, we had reasons to believe that we needed to take a harder look at the FX obligations, and we contracted Deloitte management consultants to do a forensic of all these obligations and tell us what was valid and what was not,” — — Olayemi Cardoso
I’m looking forward to the Lawyer Layi drama, may the best man win.
The short-term stability of the exchange rate at N1400/$ is also due to various CBN interventions. However, sustaining this stability requires a safety net to counteract manipulative forces. Maybe we can try Abidoshaker
The actual prices of goods and services will naturally require time to decrease, if the exchange rate continues to reduce. Otherwise, the current situation is likely to persist.
Traders and importers also lack confidence in the stability of the FX rate, and this will not give room for prices to come down. Ibukun will also argue it is greed, but let’s leave that one for whatsapp argument.
There’s also a rumor that CBN was disbursing dollars to BDCs, and later stopped. Once again, if you ask me, who exactly do you want me to ask?
The reality is, many individuals have vested interests in maintaining the current exchange rate as it benefits them financially. I have a 1 dollar note my uncle sprayed when we buried my Grandpa, I might just hold it till I can buy a benz with that. You get?
As CBN’s backlog bids farewell, the FX market throws a ‘clearance party,’ the currency pairs are doing the legwork, celebrating a newfound sense of freedom from the backlog azonto.
I’ll keep sipping Fanta and watching Cardi B from the sidelines.
Stay happy and stay hydrated✌️
