19 November 2014, LAGOS — The fortunes of the national currency, the Naira took a sharp turn downwards yesterday as it fell by 270 kobo, with the parallel market exchange rate rising to N180 per dollar from N177.3 on Monday.
Since the beginning of the month, the Naira has fallen against the US dollar by N7.9 at the interbank market, and N10 at the parallel market.
Interbank and parallel market operators attributed this sharp depreciation to restrictions introduced by the CBN to curb foreign exchange demand at the official market. Falling crude oil prices, coupled with depleting Excess Crude Account has triggered palpable anxiety about the value of the Naira. Stocks have also been hit as a result.
On October 28, in addition to a 10-kobo margin limit imposed on intervention dollars, the CBN banned banks from selling dollars to Bureaux de Change (BDCs). Furthermore, on November 6th, the CBN excluded importation of six items from official foreign exchange, saying it would no longer sell official forex for their importation. The items included electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions.
According to the apex bank, the items would henceforth be funded from the interbank foreign exchange market only.
Thus, the apex bank unwittingly shifted forex demand for importation of the six items from the official market to the interbank market.
The two restrictions combined triggered sharp increase in demand for forex in the interbank market, and scarcity of dollars in the parallel market. Though the CBN was selling intervention dollars to banks, banks could trade with the dollars because of the 10 kobo limit.
This, according to a foreign exchange dealer created a scarcity situation in interbank and the subsequent steady depreciation of the naira.
Why CBN imposed restrictions
The restrictions were imposed to stem the persistent decline in the nation’s external reserves following continued decline in price of crude oil. Within three months, the price of crude oil fell from $100 per barrel to $78 per barrel.
The sharp decline in crude oil prices occasioned apprehension among foreign investors, who believe that with decline in revenue from crude oil, and the CBN using the reserves to defend the Naira, it would not be long before the Naira suffered sharp depreciation. Hence they moved their money out of the country by divesting from the nation’s stock market and FGN bonds.
Scarcity of dollars behind Naira’s fall
Acting President, Association of Bureaux De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe in a conversation with Vanguard said the depreciation was due to scarcity of dollars in the market.
He said most of the banks are not selling dollars to BDCs, thus worsening scarcity in the market.
This was corroborated by Managing Director/Chief Executive, HJ Trust BDC, Mr. Harrison Owoh. He said that parallel market rate rose from N177.3 to N180 per dollar because there is no dollar in the market.
He said the banks are not selling to BDCs, and the two banks that sold, sold at N179 per dollar and N178.4 per dollar respectively. He added that depreciation of the Naira is not limited to the dollar, adding that it has been depreciating against the Euro and Pound Sterling in recent times too. He said the exchange rate of the Euro has risen to N220 from N117 last week.
Owoh said that the market is overwhelmed with uncertainty about the exchange rate.“In fact, we don’t know what the rate of the dollar is now”, he said.
However, investigations reveal that increasing scarcity in the market has prompted operators to resort to hoarding whatever foreign currency in their possession. It was gathered that BDCs that bought dollars from the CBN at N157 per dollar last week hoarded them, only to sell this week at N179/N180 per dollar.
CBN bows to banks
The Central Bank of Nigeria (CBN) yesterday bowed to banks’ demand for the removal of the 10 kobo margin limit imposed on intervention dollars.
Meanwhile, the Naira depreciated to N180 to the dollar at the parallel market in response to scarcity of dollars in the market.
Further probes reveal that at a meeting between the CBN and chief executives of banks yesterday, the CBN agreed to remove the 10 kobo margin limit imposed three weeks ago on intervention dollars.
Intervention dollars are dollars sold directly to banks by the CBN to stabilise the exchange rate of the Naira in the interbank market.
“Funds purchased through the CBN interventions should be utilised within two working days of delivery at a rate not more than 10 kobo above purchase rate. Consequently, intervention funds not utilised within two working days of delivery should be returned to CBN at the original purchase rate”, the CBN said in a circular signed by Mr. I.O Gbadamosi, Director, Trade and Exchange Department.
The limit however made the intervention dollars unattractive to banks and as a result they stopped purchasing the dollars from the CBN.
Investigation further revealed that the banks deliberately shunned CBN’s request for the foreign exchange quotes or offer to sell intervention dollars.
This however frustrated efforts of the apex bank to curtail depreciation of the Naira in the interbank foreign exchange market, leading to N7.45 depreciation of the national currency last week.
To arrest this development, the apex bank called a meeting of chief executives of banks yesterday to discuss recent developments in the foreign exchange market and its effort to stabilise the exchange rate.
It was reliably gathered that the bank CEOs made it clear to the apex bank the 10 kobo margin limit has to go for banks to purchase the intervention dollars.
While the meeting was in progress, the Naira continued to fall at the interbank market, with the interbank exchange rate rising to N177.3 per dollar by mid-day. It was gathered that this development and fears that the interbank exchange rate could hit N180 per dollar before the close of business yesterday prompted the CBN to accede to the request of the banks for the removal of the 10 kobo limit.
A senior foreign exchange dealer, who confirmed this development to Vanguard, said the decision to remove the limit was communicated to banks via the Reuters trading platform. In addition, the CBN and the bank captains agreed that the apex bank would continue to intervene in the interbank market.
Furthermore, the apex bank hurriedly sold intervention dollars to the banks, to arrest the free fall of the Naira in the interbank market. The move proved effective, as the interbank rate dropped sharply to N170 per dollar, before rising to close at N173.25.Naira would continue free fall.
According to Harrison Owoh, except the CBN increases dollar sale to BDCs, or allow banks to sell intervention dollars to them, the Naira would continue to depreciate in the parallel market.
“The $15,000 sold to each BDCs is inadequate to address the scarcity in the market. Once the CBN increases dollar supply to BDCs, the parallel market rate would fall significantly”, he said.
A senior foreign exchange dealer who spoke on anonymity however said the though the CBN would try to manage the situation, it is obvious that it would have to devalue the Naira very soon. He said there are increasing fears among foreign exchange dealers that the CBN surprise the market with a N15 depreciation of the naira at the official market. He said banks are already advising their customers who have dollar liabilities to move them into Naira to avoid the severe impact of a sharp devaluation of the naira.
But a former CBN Director who confided in this reporter said that the CBN can avoid a sharp devaluation by adopting some measures. “To put a small halt to the sliding Naira, CBN should allow the market operate, since it operates RDAS, which is a post mortem fixing rate process. Secondly it should use moral suasion to manage supply by encouraging dollar earning parastatals to support the market.”
*Babajide Komolafe – Vanguard