CBN to start currency future trading as pressure remains on local currency

On February 1st the Central Bank of Nigeria (CBN) announced that it would start foreign-exchange futures trading as part of efforts to smoothen out hard currency demand and help businesses to hedge their currency risk. Under the guidelines, the CBN will conduct bi-weekly auctions offering three tenors of one-, two- and three-month forwards. The minimum permissible bid by authorised dealers will be US$500,000 for each tenor. The bank said that all foreign-exchange forward purchases must be backed by trade and will not be transferable in the inter-bank market. The authorities are hoping that this initiative will lessen demand pressure in the foreign-exchange market driven by anticipation of a depreciation of the local currency, the naira. The CBN says that satisfying high demand for hard currencies at its twice-weekly Wholesale Dutch Auction System (WDAS) sales has been partly responsible for the decline in Nigerian external reserves, which stood at US$33.16bn on February 1st, compared with US$42.18bn a year earlier. Official funding of WDAS totalled US$24.84bn in 2010 as against US$25.07bn in 2009, while sales to bureaux de change amounted to US$5.34bn in 2010 compared with US$4.73bn in 2009, according to the regulator.

The CBN governor, Lamido Sanusi, said in January that the bank remains committed to a stable exchange-rate regime, but cautioned that without appropriate industrial and trade reforms to reduce Nigeria's import dependence the cost of sustaining the regime will be the erosion of foreign reserves. Another reason for the depletion of external reserves, the governor explained, is the payment of cash calls to the joint venture companies (JVC) that produce most of Nigeria's crude output. The bank expects this outflow to be stemmed when the Petroleum Industry Bill (PIB), currently before parliament, is enacted. The legislation aims to transform the state-owned oil corporation, NNPC, into a profit-making company able to tap international capital markets for its funding requirements. The Nigerian president, Goodluck Jonathan, said in early February that he expects the bill to be passed into law before the end of the current parliament in May.