Financial and economic experts have faulted the Central Bank of Nigeria (CBN) over its introduction of a longer-term contract (a five year-term) on the naira, as they described the move as a means to further frustrate the economy.
The apex regulators, through its Governor, Godwin Emefiele, had introduced the longer-term contract, which will be traded on the FMDQ OTC Securities Exchange, to attract more foreign inflows, shore up its dwindling dollar reserves and stave off a currency devaluation.
The move, according to the Managing Partners, Phyl Consult, Dr Peter Oni, would further scare investors from the emerging economy.
“Extending the futures curve may not necessarily result in renewed portfolio inflows now, as an investment in government bonds now is not encouraging. The bond yields are too low for foreign investors to get involved in longer-dated debt, hedged or non-hedged.”
According to him, the CBN now has sixty futures contracts outstanding from 13 earlier, underscoring the pressure to attract inflows and to boost reserves.
On the impact on the nation’s reserves, an investment analyst, Emmanuel Onazi, explained that the development would rather put more pressure on the nation’s reserves.
He said, “If oil prices stay low and imports continue to rise, there will be more pressure on the nation’s reserves and that will raise the risk of new capital controls being imposed.”
Meanwhile, Nigeria’s forex reserves declined to $36.68 billion as of February 10, down by 12.4% from 2018, CBN data revealed, as the bank burns through its dollar savings to support the naira.
In January, CBN Governor, Godwin Emefiele said that no adjustment of the naira was planned and that the bank would continue to sustain the value of the currency, even though its dollar reserve was shrinking.
Emefiele led-apex bank has kept the naira stable even as oil prices dropped and foreign investors booked profits on local bonds in response to falling yields. The bank operates a multiple exchange rate regime that it has used to manage pressure on the naira.
The CBN on Thursday offered naira-futures contracts for five-year settlement for the first time, priced at N379.81 to the U.S. dollar, traders said. The longest tenor prior to this was a 13-month contract, which the CBN has offered for more than a year.
The naira has come under pressure this year as importers demand dollars to feed Nigeria’s consumers and as the market sentiment worsen by fears that the coronavirus outbreak would hit Chinese demand, one of Nigeria’s major trading partners, and dampen growth.