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Central Bank to curb currency speculation

By on April 23, 2011

As part of efforts to reduce pressure on the naira, the Central Bank of Nigeria (CBN) will today commence the sale of foreign exchange forwards. The sale was supposed to have commenced last Tuesday but had to be postponed due to the introduction of reserve averaging, which was introduced on March 9.

A statement by Mohammed Abdullahi, CBN spokesperson, while explaining the development on the reserve averaging, said, “Being new to the Deposit Money Banks, they require some time to fully digest it.”

A currency forwards market allows traders to lock in the price at which an entity can buy or sell a currency on a future date. In currency forward contracts, the contract holders are obligated to buy or sell the currency at a specified price, at a specified quantity, and on a specified future date. These contracts cannot be transferred.

Market is ready for it

Akinsowon Dawodu, president of the Financial Market Dealers Association (FMDA), believes it is a good idea, if only the CBN can pull it off successfully.

“Consumers are keen and will be glad to have hedging options. The market is ready for it and I think it will depend on its implementation,” Mr. Dawodu said.

He said the efficiency will determine its outcome, going forward. “The effect should reduce some of the panic buying that sometimes arises in the foreign exchange market and in so doing, it will relieve some of the occasional periodic pressure that the naira finds itself under. In the long run, it should help achieve the aim of exchange rate stability,” he added.

He said the introduction would give customers options to hedge against foreign currency exposure, “which should translate to healthier economic activities and better planning on the part of customers.”

According to guidelines recently released in January by the CBN on forwards trading, all hedge transactions with the customers must be backed by trade (visible and invisible) transactions.

“The maximum tenor allowed for foreign exchange forwards and by implication foreign exchange swaps and cross-currency Interest Rate Swaps is now extended to five (5) years. Authorised Dealers may seek specific approval for longer tenors,” the guideline stated.

According to Mr. Dawodu, the swap option will be useful for corporates, as a five-year requirement would allow market to hedge their exposures further into the future. “In practical use would be for a customer who needs a five-year dollar loan but has naira. He could swap his naira for dollar and pay interest, which will be set every quarter over the period,” he further said.

Razia Khan, regional head of Research, Africa, Global Research at Standard Chartered Bank in London, said the huge spending ahead of the elections next month has been a factor in the strength of demand for foreign exchange.

“For now, we do not expect sustained tightening beyond that level, but much depends on how easily demand for foreign exchange is,” Ms. Khan said.

According to the CBN guideline, all foreign exchange forwards bought from the CBN are not transferable in the inter-bank market while authorised dealers are expected to bid on behalf of their customers. This is in order to discourage round tripping.

Source : Thisday