In a bid to reduce pressure on the naira, which has come under speculative attacks in recent weeks, the Central Bank of Nigeria on Wednesday announced the closure of the Retail and Wholesale Dutch Auction Systems of the foreign exchange market.
The closure, which takes immediate effect, was confirmed in a statement issued by the Director, Corporate Communications Department, CBN, Mr. Ibrahim Mu’azu.
In taking the step, the central bank was said to have fixed the exchange rate of the naira to the dollar at 198, which is N30 above its N168 (+/-5 per cent) rate.
As a result of the plunge in global oil prices, the CBN had in November devalued the naira by eight per cent as it officially pegged the currency at 160-176 to the dollar.
Following the postponement of the general elections by six weeks on February 7, the naira hit an all-time low of 202 against the dollar at the interbank segment of the foreign exchange market last week, stoking speculation that the CBN might devalue the currency again.
In a new report entitled: ‘Nigeria: Devaluation pressures grow’, the Ecobank’s Economics Research Desk, headed by Mr. Angus Downie, said for a second time in recent days, the CBN sold the US dollar outside of the Retail Dutch Auction and interbank market on Monday.
The report stated, “The CBN asked banks to submit the amount of the US dollar demand they required based on a selling price of N198, with bids assessed on the banks’ actual levels of client demand.
“With the CBN selling N30 above its N168 (+/-5 per cent) rate, this could be seen by some in the market as a de facto devaluation. However, the N168 reference rate remains unchanged and the move appears to be an attempt to inject the US dollar liquidity to calm the foreign exchange market.”
The Ecobank analysts said the market would likely see the latest move as a realisation by the CBN that the N168 rate was unsustainable, adding that the bank would be hoping that it had helped to re-establish the credibility of the N168 rate.
“We think the N168 rate is unsustainable. Any further, prolonged intermediation outside of the RDAS highlights this, as does the continued erosion of foreign exchange reserves — they now stand at around $33.04bn, down around $10bn compared to one year ago.
“Moreover, the official N168 rate does not provide an accurate measure of where the market clears. This leads us to think that the CBN is managing expectations of another devaluation.”
They said this was despite the CBN’s efforts at trying to dismiss any talk of an exchange rate adjustment, let alone shifting policy to a free floating regime.
This, they stressed, was understandable given the high level of import dependency and the cost to the economy arising from such a move.
The report said, “Nonetheless, the pressure on the exchange rate means that something has to give and devaluation provides some temporary relief. However, unless oil prices rise strongly to provide a large increase in foreign exchange reserves, ultimately, a flexible exchange rate regime helps the economy to adjust to external shocks and allows the CBN to conduct monetary policy according to the needs of the economy (without having to take into consideration how exchange rate policy affects domestic demand).
“Until such a change is made, and assuming oil prices remain low, further exchange rate pressures will likely push up bond yields as investors close out longer positions and remain cautious to short-term exposure. Despite some opportunities to buy, the US dollar liquidity shortages will maintain foreign investor caution, adding to the upwards push on yields.”
Explaining the reason for the closure of the windows, the CBN said in the statement that the widening margin in both segments of the market had engendered undesirable practices such as round-tripping, speculative demand, rent-seeking, spurious demand and inefficient use of foreign exchange resources by economic agents.
These, the bank noted, had continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sectors of the economy and the general public.
The reserves closed at $34.28bn on December 31, 2014 but had been depleted to $32.66bn as of February 16, 2015.
The CBN statement read in part, “In recent times, with the sharp decline in global oil prices and the resultant fall in the country’s foreign exchange earnings, the bank has observed a widening margin between the rates in the interbank and the rDAS window, thus engendering 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 general public.”
In order to address this, the bank said it had become imperative to take appropriate actions to avert the emergence of multiple exchange rate regime and preserve the country’s foreign exchange reserves.
It said henceforth, all demands for foreign exchange should be channelled to the interbank market, adding that only genuine demands for foreign exchange would be met.
The statement added, “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.
“Consequently, we wish to inform all authorised dealers and the general public that, with effect from the date of this press release, the rDAS/wDAS foreign exchange window at the CBN is hereby closed.
“Henceforth, all demand for foreign exchange should be channelled to the interbank foreign exchange market. For the avoidance of doubt, all authorised dealers and the general public should note that the CBN will continue to intervene in the interbank foreign exchange market to meet genuine/legitimate demands.”
Reacting to the decision of the CBN, the Associate Director and Head, Equity Research, FBN Capital Limited, Mr. Olubunmi Ashaolu, stated in an emailed response to questions from one of our correspondents that the closure of the rDAS was “unexpected, but the market was expecting the CBN to do something about the gap between the official and interbank rates. The official market rates were unsustainable given where all the other rates were.”
Asked if it implied another devaluation of the naira, Ashaolu said, “Formally, the CBN is shutting the rDAS, but I guess officially, they’d say this is temporary, or to be more precise, the CBN did not say the rDAS is scrapped forever.
“But to the market, this is almost the same thing as devaluation since nobody can buy dollars at a better rate than the interbank rate.
“As long as the CBN provides enough dollars to cater for the additional demand that will move into the interbank, the naira should not depreciate further. I don’t want to say it will appreciate although there is theoretically a reason to argue that such a scenario could well play out if the dollar demand from those that used to buy in the rDAS softens.”