In a bid to calm the foreign exchange market, the Central Bank of Nigeria (CBN) is to begin the sale of currency forwards next week.
Forwards transaction, which helps Nigerian businesses especially exporters, hedge against fluctuations in future exchange rates, means a binding agreement by two parties where one commits itself to sell a predetermined amount of currency for settlement on a future date and at a pre-agreed exchange rate.
CBN Deputy Governor, Economic Policy, Dr. Sarah Alade, said yesterday that the banking watchdog will commence sale of currency forwards next week.
The apex bank announced last month that the foreign exchange forwards transaction had been postponed till April 6.
A circular to banks to this effect sent via Reuters, which was signed by the CBN Acting Director, Financial Markets Department, Mr. Olajide Francis Owolabi, said: “This is to inform all authorised dealers that the commencement of the proposed FX Forwards Transaction has been shifted from Wednesday 16th, March, 2011 to Wednesday 6th April, 2011. Thank you.”
The postponement created panic necessitating a sudden rise in the exchange rate at the inter-bank market, which traded at N155.80 to a dollar. This is almost N5 above the CBN official exchange rate (N150.9/1$).
But the CBN Deputy Director said the apex bank announced the postponement last Monday beacuse “the CBN did not want to be doing too many things at the same time.”
She said: “We want the implementation of the financial markets reforms to start first and want them (the banks) to study it so that we (CBN) are not doing too many things at the same time. But because of the way the market is reacting, we have decided to begin next week.”
Dr. Alade added that the CBN was planning to devalue the naira.
At the parallel market otherwise known as the black market, a dollar, which exchanged at N154 last Monday traded for N155 yesterday.
The amount of foreign exchange the banking watchdog offers for sale at the DAS today will determine the direction of the exchange rate.
Demand for foreign exchange at the official market (Dutch Auction System, which holds bi-weekly) has lately increased with CBN not fully meeting it. Last Wednesday, banks on behalf of their customers demanded $370.6million, while CBN offered and sold $300million – leaving a gap of $70.6million, which would be sourced from the parallel maket. Last Monday’s demands were also not fully met. Banks demanded $434million, while the apex bank offered and sold $400million.
This year, $5.1billion has been sold by the CBN, while the nation’s foreign exchange rate, which can finance at least seven months imports stood at $35.9billion as at March 10, 2011.
The International Monetary Fund (IMF) had in its Staff Report for the 2010 Article IV Consultation last month stressed the need for Nigeria to have a greater exchange rate flexibility to prevent speculations in the foreign exchange market and mitigate external shocks. This was misconstrued to suggest a call for devaluation.
CBN Governor Mallam Sanusi Lamido Sanusi had, in his response, said there was no “fundamental reason” to devaluet he naira “given that the current position of the reserves could defend the national currency.”
But Country Chief and Senior Resident Representative, IMF Nigeria, Mr. Scott Rogers, at a press briefing in Abuja explained that the reference in its report to the need for greater exchange rate flexibility to prevent speculations in the foreign exchange market and mitigate external shocks does not in any way suggest a call for devaluation.
