Nigerian firms are unable to meet letter of credit (L/C) commitments as the country is plunged into a severe crisis over the central bank's failure to settle US$2.4 billion of overdue foreign exchange forward contracts.

The discovery of US$2.4 billion in invalid foreign exchange forward contracts by the Central Bank of Nigeria (CBN) revolves around a forensic audit that uncovered significant irregularities.

Forex backlog

When Olayemi Cardoso assumed office as the CBN governor last year, the bank faced a backlog of foreign exchange obligations amounting to US$7 billion.

To address concerns about the legitimacy of these obligations, the CBN commissioned a forensic audit by Deloitte management consultants.

Fraudulent transactions

The audit revealed that US$2.4 billion worth of these transactions were either fraudulent or lacked proper documentation.

For instance, some transactions were found to have been allocated large sums of foreign currency without any corresponding request or proper backing in naira.

Contracts not validated

As a result, the CBN refused to validate these contracts, citing concerns about their legality and documentation.

This decision has sparked significant controversy, especially among Nigerian manufacturers and businesses that relied on these forward contracts to hedge against foreign exchange risks.

Impacts on L/C business

Many businesses have used bank-confirmed credit lines to open L/Cs, paid import duties, and received their goods, while their suppliers were primarily settled by their banks' correspondent banks.

Other businesses meanwhile now face severe financial difficulties due to the sudden invalidation of the contracts, which has drastically increased their costs, especially in light of the devaluation of the naira.

Calls for re-evaluation

The issue has led to calls for the CBN to re-evaluate its decision, particularly for businesses that can prove their transactions were legitimate.

The situation has also prompted the Nigerian Senate to launch an investigation to further scrutinise the CBN's actions and potentially identify any genuine transactions that were unfairly invalidated​

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.