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CBN Closes FOREX To Revive Fallen Naira

CBN Closes FOREX To Revive Fallen Naira

The Central Bank of Nigeria (CBN), on Wednesday, closed the Retail Dutch Auction System (RDAS) and Wholesale Dutch Auction System (WDAS) foreign exchange window.

This may not be unconnected with the fact that the apex bank had to intervene repeatedly in the market to save the Naira, with the inter-bank market closing after hitting the set limit.

Godwin Emefiele, CBN Governor

The bank, for example, sold $401 million at N198.50 per dollar, last week, wider than its target band of N159.60 – N176.40/$ last week.

Owing to such interventions, the nation’s foreign reserves have fallen to $32.661 billion as at February 16, 2015, representing a decline of $854.424 million or 2.55 per cent in the past one week. Since the end of January, Nigeria’s foreign reserves have dropped by $1.619 billion or 4.72 per cent.

A statement by Ibrahim Muazu, the apex bank’s Director of Corporate Communications, directed that all demand for foreign exchange should henceforth be channeled to the interbank foreign exchange market.

In the statement emailed to our correspondent from Abuja, he linked the decision to the sharp decline in global oil prices, leading to a fall in Nigeria’s foreign exchange earnings, resulting in an observed widening margin between the rates in the interbank and the retail Dutch Auction System (rDAS) window.

This, he continued, has engendered “undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.

“This has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the public.

“In view of the foregoing, it has become imperative that appropriate actions be taken to avert the emergence of a multiple exchange rate regime and preserve the country’s foreign exchange reserves,” the statement added.

While the RDAS is the direct sale of forex by the CBN through the banks to the end users of the forex, the WDAS involves the CBN receiving bids from authorised dealers for purchase of forex.

In spite of  the fact that the managed float exchange rate regime, which the bank had adopted following the liberalisation of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability, the CBN lamented that aims of this policy have been defeated in recent times.

The CBN assured all authorised dealers and the general public that it would “continue to intervene in the interbank foreign exchange market to meet genuine/legitimate demands.”

Reacting to the decision, Managing Director, Global Research at Standard Chartered Bank Limited, London, Razia Khan, in a note to our correspondent, noted that the CBN is by this discontinuing subsidy on forex sales.

“A statement from the Financial Markets Dealers Association of Nigeria (FMDQ), quoted on Reuters, suggests that the CBN will sell US$ at a fixed rate of NGN 198 to the interbank market for the time being. This is an effective devaluation of the official Nigerian Naira (NGN) exchange rate.”

She said the fall in the value of the Naira “was frequently large enough to trigger a daily shutdown of Nigeria’s FX market.

“In response to these pressures, the CBN intervened directly through special auctions, filling demand for FX directly, but at a much higher USD-NGN exchange rate than that prevailing at the bi-weekly official Retail Dutch Auctions (RDAS).

The decision, she wrote, “is positive news, and should help create more transparency in the Nigerian market. However, with oil prices currently at levels where FX reserves will be difficult to replenish, the CBN’s appetite for continued support of the interbank FX rate will be closely monitored.”

Currency dealers can henceforth only buy dollars on the interbank market with quotes that are backed by orders from customers, Bloomberg quoted Jibril Aku, vice chairman of FMDQ OTC Plc, as telling reporters in Lagos on Wednesday.

Moving to an order-based two-way quote system will avoid speculation and dissuade people from buying forex in anticipation of Naira weakness, he said.

“There hasn’t been excess supply or excess demand in the market, indicating stability has returned” since the measures were introduced on February 13, said David Adepoju, president of the Financial Markets Dealers Association, the parent organisation of the FMDQ.

The Central Bank will intervene to buy excess dollars “or sell to meet excess demand at the end of each day’s trading,” he said.

“The Central Bank is expected in the market daily,” Aku added.

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