CBN intervenes to prop up the Naira

Central-Bank-of-Nigeria-CBN*Naira appreciates 2.35% against the Dollar
10 November 2014, Lagos – The naira appreciated by 2.35 per cent against the United States dollar on Friday after the Central Bank of Nigeria, CBN, sold dollars to prop up the value of the nation’s currency.

The naira closed at N165.90 to the dollar compared with the N169.90 to the dollar the previous day.

CBN Deputy Governor (Economic Policy), Dr. Sarah Alade disclosed to Bloomberg that the central bank intervened in the market to defend the naira after it plunged to an all-time low amid a drop in oil prices.

Alade said: “We are in the market now. We haven’t abandoned the market. We will continue to defend the currency.”

The naira had touched new intra-day lows of N173.02 on Friday amid demand for dollars, partly from foreign investors unnerved by falling oil prices exiting Nigeria and partly from domestic importers worried about the risk of currency devaluation. Dealers said the central bank sold undisclosed amount of dollars.

“We saw the central bank increase its dollar sales at the interbank market today to counter surging demand and reassure the market of its intention to continue to defend the naira,” one dealer told Reuters.

Traders said the dollar sales by the central bank coupled with flows from the Nigerian National Petroleum Corporation on Thursday further strengthened the local currency. The central bank on Thursday restricted the sale of dollars to importers of telecoms equipment, power generators and finished products at its foreign exchange auction, funnelling demand towards the interbank market.

The central bank will probably raise its benchmark rate, already at a record high of 12 per cent, to avoid burning through the nation’s reserves after they fell to a three-month low of $38 billion, according to Capital Economics Limited in London. “The bank is making efforts to defend the currency,” Director, Corporate Communications, CBN, Mr. Ibrahim Mu’azu said.

He added: “We don’t want any crash. There is no decision to devalue the currency. “We believe that the events over the past few days have raised the likelihood of the policy rate being hiked,” Johannesburg-based strategists at Barclays Africa Group Limited, Ridle Markus and Dumisani Ngwenya stated.

“The likelihood of an emergency meeting next week, two weeks ahead of the scheduled meeting, cannot be excluded”, he said.

Analysts at Afrinvest West Africa Limited stated in report to THISDAY yesterday that the new CBN policy that excludes some importers from the Retail Dutch Auction System (RDAS) of the forex market would “cushion the effect of capital reversal in the medium term and moderately support the accretion of reserve.

“However, the anticipated increased demand at the interbank will exert pressure on interbank rates, widening the spread between the Interbank and official rates further going forward,” they added.

Also, a banking analyst at Renaissance Capital, a financial advisory firm in Lagos, Mr. Adesoji Solanke, said the policy would have more of an implicit asset quality implication for the sector.

He added in a note: “Customers that are affected by this transfer of their forex demand to the interbank market basically see their imports get 8-10 per cent more expensive (based on where the interbank rate traded today versus the official RDAS).

“Speaking with one of the banks, the rough estimate of the volume of official demand that is getting transferred was put at 30-35 per cent, which is quite significant. “The rules hurt at a sector level but we see the tier- 2 banks taking more pain on the back of this given their relatively higher exposure to SMEs and lower quality obligors. The ability of the obligors to transfer this cost to consumers also affects their capacity to service open obligations.”
*Obinna Chima – Thisday

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