Overdue forward payments, shrinking reserves behind naira depreciation, says Wale Edun

Wale Edun, the minister of finance, has linked the continued decline in the value of the naira to overdue forward payments of $6.8 billion, Bloomberg is reporting.

Forward payment in the foreign exchange (Forex) market relates to the buying or selling of currencies at a predetermined price on a future date.

It is used to hedge against the volatility of the forex market. So, a buyer can enter into an agreement with a seller to buy forex at a specified price different from the spot price at a future date.

The change in the current price does not affect the agreed rate.

However, if the market price surpasses the future rate, it would be a loss to the seller, but if the cost of the forex drops, it will be a gain. Regardless of the market price movement, the buyer has used the predetermined rate to hedge inflation.

Edun told Bloomberg on Thursday that the naira will recover once the overdue contracts are settled, as it would ensure additional foreign exchange flows into the forex market.

On Friday, the naira further depreciated to N995 at the parallel section of the foreign exchange (FX) market, the figure represents a depreciation of N15 or 1.53 percent from the N980 it traded two days ago.

At the official side of the market — the investors’ and exporters’ window (I & E) — the local currency appreciated 3.40 percent to close at N738 to the dollar on Thursday.

DECLINING FOREIGN RESERVES SUPPORT VOLATILITY IN FX MARKET

Nigeria’s foreign reserves declined by $1.16 billion in the last three months, from $34.44 billion on June 20 to $33.28 billion as at Wednesday.

The country has been struggling to ramp up its reserves as oil revenue declines and foreign investors cut back on their portfolio and direct investments in Nigeria.

This has reduced forex liquidity, resulting in scarcity that has supported the increase in the dollar rate in the official window and the parallel market. 

Edun said the challenge is that the market is not liquid enough, hence the fiscal and monetary reforms to boost liquidity.

“We are committed to encouraging liquidity based on reforms that have been made at the moment, on the fiscal side and the monetary side. And together with the restoration of trust and confidence we think the FX flows will return,” the minister said.

“The commitment is to maintain the existing reforms and improving them. Improving the FX market further so the gap narrows”. 

Edun added that the government is weighing options to boost supply amid declining reserves, in a bid to reverse speculators’ bet against the naira.