Naira seen benefiting as forward FX contract pressure shrinks
Nigeria’s naira should benefit in coming months from a let-up in pressure from forward central bank foreign exchange contracts, after the market absorbed the equivalent of $1.3 billion last week.
That’s the verdict of Rand Merchant Bank in Lagos, which estimates outstanding forward contracts will total just $198 million between now and December.
“We expect the pressure on the naira to ease going into the second half of the year,” said RMB’s Ademola Olayiwola. “We expect some stability in the forex market.”
The forward contracts are a legacy of a central bank decision in 2016 to use them to ease dollar demand at that time. They are non-deliverable, which means the only money that changes hands is the amount of naira profit or loss on the contract, rather than underlying notional dollars amounts.
That contributed to the Nigerian currency losing 9.9% of its value last week to close at 1,486 per dollar, as investors sought to convert naira they received from the unwound futures contracts into greenbacks. It closed Monday at 1,476.1.
The decline was despite the central bank selling dollars to banks and offering bills at record interest rates to mop up excess liquidity in the Nigerian currency.
The naira has fallen around 68% against the dollar since President Bola Tinubu eased foreign exchange controls and scrapped fuel subsidies a year ago as part of reforms to spur economic growth and attract foreign investment.
The moves were welcomed by foreign investors but have contributed to a cost of living crisis in Africa’s most populous nation, pushing inflation to a 28-year high and prompting the central bank to raise interest rates to a record 26.25% last month.
“Yields have to remain elevated to attract a reasonable level of FX inflows to meet foreign currency obligations and stabilize the exchange rate,” Olayiwola said.
