CBN sells a dollar to banks at the rate of N198

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."
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