The Central Bank of Nigeria (CBN) has, with effect from Wednesday, stopped its weekly auction sales of United States dollars in an attempt to save the naira and foreign exchange (FOREX) reserves that have received serious hit in recent time.

Financial experts have interpreted this to mean that naira has been devalued to N198 to $1, the exchange rate at the Interbank.

The bank explained that selling of dollars at the Retail Dutch Auction System and Wholesale Dutch Auction System (rDAS/wDAS) foreign exchange window at the CBN had been closed and all demand for foreign exchange will only be channelled to the interbank forex market.

This was contained in a press statement signed by Ibrahim Mu’azu, Director; Corporate Communications Department CBN entitled, ‘Closure of the CBN rDAS/wDAS foreign exchange window,’ and made available to Nigerian Tribune.

According to the statement, though the managed float exchange rate regime, which the CBN had adopted following the liberalization of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate, however, 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.

It said this has engendered undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.

The bank said, 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 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.

“Consequently, we wish to inform all authorized 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.

Meanwhile, some financial and economic experts have agreed that the discontinuation of the Retail Dutch Auction System/Whosale Dutch Auction System (RDAS/ WDAS) window under which foreign exchange was previously available at a subsidised rate is effective devaluation of the official naira exchange rate.

A statement published by the Central Bank of Nigeria (CBN) on Wednesday had explained that going forward; all demand for foreign exchange (FX) would be channelled through the interbank FX market instead.

The experts in separate interviews and emailed statements to Nigerian Tribune were unanimous that since the apex bank has been selling dollars at N198 to the dollar outside its target band, it has indirectly devalued the naira.

According to them, selling the US dollar at N198/$1 below target band of N160-N176 CBN set in November when it devalued the currency by 8 percent to save foreign reserves, the naira is officially devalued.

The Financial Markets Dealers Association of Nigeria (FMDA), in a statement suggests that the CBN will sell US dollars at a fixed rate of N198 to the greenback at the interbank market for the time being.

“This is an effective devaluation of the official Nigerian naira exchange rate,” the statement explained.

A parallel market foreign exchange dealer at the Murtala Muhammed International Airport Mallam Kabiru Sanni said the move will make dollar more scarce and if the apex bank does not monitor the process well enough, it will create a counter-productive effect on the naira because there will be increased pressure on the naira exchange rate “already selling at above N214 at the black market.”

An Economist and Regional Head of Economics, Africa at Standard Chartered Bank London, Razia Khan said this is a positive news because already, the naira losses were frequently large enough to trigger a daily shutdown of Nigeria’s FX market; adding that the move 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,” she stated.

With Nigerian FX reserves under pressure as a result of weaker oil prices, markets had anticipated eventual unification of Nigeria’s different exchange rates, but following the announcement in February that presidential and parliamentary elections would be postponed to 28 March, Nigerian markets had been subject to greater volatility.

In response to these pressures, the CBN intervened directly through special auctions, filling demand for FX directly, but at a much higher dollar-naira exchange rate than that prevailing at the bi-weekly official retail Dutch auctions.

“With FX reserves under pressure, and amid growing concern that a wide RDAS-interbank spread would encourage ‘round-tripping’, the CBN will now stop RDAS auctions, effectively discontinuing its FX subsidy for certain categories of demand.

“Henceforth, all demand for foreign exchange should be channelled to the INTERBANK FOREIGN EXCHANGE MARKET,” the statement read in part.

CBN however assured all authorized dealers and the general public that it will continue to intervene in the interbank foreign exchange market to meet genuine/legitimate demands.

In the same vein, daily intervention by the CBN, as a new trading system may have started yielding result as the local currency gained N1.0 kobo at the interbank market according to CBN records.

Information made available to Nigerian Tribune from the office of the Special Adviser to the CBN governor showed that naira yesterday closed at N197 to the dollar at the interbank market as against N198 recorded on Tuesday.

Currency traders can only buy dollars on the interbank market with quotes that are backed by orders from customers, Jibril Aku, vice chairman of financial Markets Dealers (FMD), told reporters in Lagos on Wednesday. Moving to an order-based two-way quote system will avoid speculation and dissuade people from buying the greenback 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 Feb. 13, said David Adepoju, president of the Financial Markets Dealers Association, the parent organization of the FMDQ. Bloomberg quoted David Adepoju as saying that the central bank will intervene to buy excess dollars “or sell to meet excess demand at the end of each day’s trading.”

Source: TRIBUNE