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 CBN sells dollar to banks at N198

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PostSubject: CBN sells dollar to banks at N198   2015-02-19, 06:00

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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