Nairametrics/Reuters| Information from currency traders reveals that the Central Bank of Nigeria sold about $660 million in three- and five- month currency forwards at an auction aimed at clearing a backlog of dollar demand.
Last Wednesday, the central bank had asked commercial lenders to bid in a special currency auction targeted at clearing backlog of dollar obligations of manufacturing, airlines, agriculture and petroleum sector.
Traders said the results of the auction was announced late Tuesday while payment for the dollar sales is due on Wednesday.
This is the first major dollar sales to the key sector by the central bank this year in a bid to spur growth and revive Africa’s biggest economy which slipped into recession last year due to currency crisis necessitated by drop in global oil prices.
Currency Forwards
Since the launch of the flexible exchange rate policy in June 2016, the central bank sold currency forward as a means of managing liquidity. It enters into forward contracts with companies seeking to repatriate their money in foreign currency, promising to deliver the FX at a future date rather than selling to them immediately. However, the naira equivalent in paid for immediately. The latest forward sales is for 3 months and 5 months.
Currency forwards creates a “win win” situation for both the CBN and currency buyers. For the CBN it helps them manage their cash flow better giving them ample time to generate enough dollars to meet the requirements of foreign companies providing strategic services in Nigeria. For the companies, currency forwards this provides a significant hedging advantage against currency volatility such as is prevalent in Nigeria. By entering into the forward contract with the CBN, the purchase forex at today’s price in exchange for a naira deposit. At the due date of the contract, the are paid the forex equivalent while they pay the CBN the naira balance.