Forwards contracts lead CBN dollar sales with $11.2bn - VANGUARD
By Babajide Komolafe
Foreign exchange, forex, sales by the Central Bank of Nigeria (CBN) was dominated in 2017 by Forwards contracts which accounted for $11.2 billion or 70 percent of total sales.
Unlike spots transactions which involves immediate delivery, forwards are transactions which involves delivery of forex at a future agreed date but at current exchange rate. A breakdown of the annual report of the Financial Market Department of the apex bank for 2017 revealed that forex sales for forward contracts rose by 44 percent to $11.2 billion in 2017 from $5.8 billion in 2016.
This exceeded the 30 percent increase in total foreign exchange sales by the CBN which rose to $15.8 billion in 2017 from $12.2 billion in 2016. CBN Headquarters Managing Director/Chief Executive, Financial Derivatives Company Limited, Mr. Bismarck Rewane, however, noted that this trend will not persist in 2018, as the conditions that necessitated the dominance of forwards contract no longer exist.
Speaking to Vanguard, he said: “When you buy into a forward contract, you are buying at the official rate but they will deliver to you in 90 days and in some cases 120 days. “When the CBN had shortage of foreign exchange they managed it by doing forwards contract but now that the reserves are strong, they are doing spot transactions.
The benefit of the forwards is that it helps to manage the cash flow and secondly, the implied rate is different from the effective rate. That is, if they sell to you at N330 per dollar, and take your money 90 days ahead, by the time you add the treasury bills rate to it, you will find out that effectively you have paid N340 per dollar.
So it is another way of devaluing the currency. “But the constraints that led to that last year are no longer there. We have gone beyond that now. That time the reserves were doing $23 billion to $24 billion, but now we don’t need to panic.” The report had stated: “In 2017, the CBN maintained its direct intervention in the inter-bank foreign exchange market to cushion the demand pressure and ensure exchange rate stability.
Consequently, a total of $15.82 billion was sold at the inter-bank segment. “This comprised $1.53 billion at the inter-bank spot, $1.39 billion for invisibles, $1.07 billion for SMEs, $622 million at the I & E, while forwards sales were $11.19 billion. On the other hand, the Bank purchased $6.09 billion at the inter-bank market.
Thus, net sales by the Bank amounted to $9.73 billion. The sum of $10.73 billion matured at the forwards segment, while $1.92 billion remained outstanding at end-December 2017. “In the preceding year, $12.16 billion was sold at the inter-bank market, comprising $6.30 billion spot and $5.85 billion at the forwards.
In the same vein, the Bank purchased $130.98 million, resulting in a net sale of $12.24 billion. The sum of $4.29 billion matured at the forwards, while $1.56 billion remained outstanding at end-December 2016.”
Read more at: https://www.vanguardngr.com/2018/06/forwards-contracts-lead-cbn-dollar-sales-11-2bn/