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Financial experts say there is increase demand for foreign exchange, while external reserves dwindle.

The experts
revealed that Nigeria’s foreign exchange demand is gradually
increasing, with a noted surge in May, while the nation’s external
reserves is declining steadily, an implication of which could
exacerbate currency pressure and spur further depletion of external
reserves as the Central Bank intervenes in the market.

Bismarck Rewane,
managing director, Financial Derivatives Company, a finance and
research analysis firm said “Forex demand surged in May, increasing by
55 per cent and 54 per cent compared to demand in April and March.
External reserves are approximately $38.8 billion, a significant
decline of 3.7 percent from $40.3 billion as at April 28.”

Mr. Rewane added
that part of the increase may be due to the usual increase in forex
demand during the summer season. Another explanation could be the
increase in business activities, using the number of ships awaiting
berth in Apapa and Tincan as a proxy. Latest figures show that the
number of ships increased to 110 from 87 in April.

“One area of
concern is the low nominal and negative real interest rates which could
induce more capital flight as a result of interest rate arbitrage,” he
said. “The implication of this is an increase in forex demand that
could exacerbate currency pressure and spur further depletion of
external reserves as the CBN intervenes in the market.”The money market
was highly volatile in the last three weeks as rates across all
maturities and instruments losing almost all they gained in second and
fourth week of May.

Increase in credit disbursement

The spike in rates
began during the second week and lasted till the fourth. Analysts
attributed this sudden spike to increase in credit disbursement to
selected companies and major outflows from the market, including N104bn
Wholesale Dutch Auction System (WDAS), funding NNPC’s forex sale of
N22billion and TB auctions of about N65billion.

Gali Suleiman
Kabiru, the spokesperson of a section of Hausa currency changers in
Marina, Lagos, was however optimistic that if the present stability in
the market was maintained, it would gradually work the currency back to
its previous value. The naira recorded a depreciation of -0.13 percent
loss in May, due to increased pressure on margins particularly for
multinationals. Bonds and dollars were May’s two big winners. 10 year
treasury yield touched its lowest level in a year. Dollar gained 8.51
against the euro. Emerging markets stand the risk of seeing new
investment flows squeezed.

Finance experts say Nigeria in
particular is vulnerable to this deterioration in world markets since
it intends to raise $500 million through a Euro bond issue. However
Nigeria’s foreign exchange reserves slipped further to $38.79 billion
by last Friday from $40.28 billion in May, the Central Bank said last
week. Increased dollar demand at the central bank’s bi-weekly forex
auctions in the last two months had put pressure on the reserves, with
the regulator raising its weekly sales from an average of $500 million
in March to $900 million by April.</