A Review of the Nigerian Energy Industry

Naira depreciation persists in interbank, parallel market

01 December 2014, Lagos – The Naira fell to an all time low against the dollar at the interbank and parallel exchange markets despite measures announced by the Central Bank of Nigeria (CBN).

At the interbank market, the Naira lost another 160 kobo against the dollar as the interbank rate rose to an all time high of N178.70 per dollar. Consequently, the naira depreciated by N13.05 or 7.87 percent against the dollar in November.

Mr. Godwin Emefiele, CBN governor

Similarly at the parallel market, the Naira lost N17 against the British Pounds Sterling, as N190 exchanged for one pound as at the end of Friday from N173 the previous week.

Foreign exchange dealers attributed the continued depreciation of the dollar to inadequate supply in the market. The inadequate supply it was gathered is being aggravated by expectation of further depreciation of the naira.

Last week the CBN announced 8.4 percent devaluation of the Naira by moving the midpoint of the official exchange rate to N168 per dollar from N155. The apex bank also tightened money supply by raising the Monetary Policy Rate (MPR) to 13 percent from 12 percent, and banks’ cash reserve requirement (CRR) for private sector deposit to 20 percent from N15 percent.

These decisions were aimed at arresting the persistent depreciation of the naira, and restore calm and stability to the foreign exchange market. The increase in MPR was also aimed at encouraging foreign exchange inflows from foreign portfolio investors.

Vanguard investigation however revealed that these measures might not have the desired impact due to expectation of further depreciation of the naira. Speaking on condition of anonymity, Head Treasurer of a Tier 2 Bank told Vanguard that expectation of further depreciation is prevalent in the market.

This expectation, he said is driven by developments in the international crude oil market and continued decline in the external reserves.

“With decline in crude oil prices expected to persist, following the outcome of the OPEC meeting last week, and the continued decline in external reserve, the general belief is that the CBN might have to further devalue the Naira”.

According to a top bureaux de change operator, there is expectation that Naira would fall to N200 per dollar in the parallel market. “Right now there is no dollar. Some people are begging for dollars to buy, while those who have said they would only sell when the rate hits N200 per dollar.

A market analyst who spoke on anonymity said that the CBN needs to be more coordinated in its foreign exchange management approach so that the decisions of the MPC can have the desired impact.

He noted that with the devaluation of the Naira, the official exchange rate and the interbank rate should fall within the new exchange rate band of plus or minus N168. But now the interbank rate is far out of this band, and it would continue except the CBN amends some of the recent policy measures.

He said the recent exclusion of six items from official market and transfer to the interbank market should be reversed, while the CBN should increase dollar sales at RDAS to meet demand.

“By so doing, the CBN would be able to ascertain the amount of demand, and also reduce pressure on the interbank rate and enhance appreciation of the Naira in the interbank market.

Right now, the market keeps on absorbing intervention dollars sold by the apex bank, without clear indication of what the dollars are being demanded for,” he said.

*External reserve down by $1.61bn as CBN sells $2.6bn

Meanwhile the nation’s external reserve fell by $1.61 billion last month to $36.85 billion as at November 27th from, N38.46 billion. Consequently the external reserve has fallen by $7.08 billion this year, from 43.93 billion.

The decline in reserves reflects increased foreign exchange sales by the CBN in its bid to defend the Naira.

Last week, the CBN increased dollars sale by 50 percent at the bi-weekly Retail Dutch Auction System (RDAS). Results of the RDAS sessions conducted during the week show that dollar sale rose to $765.85 million from $511 million the previous week, indicating 49.9 percent increase.

Further analysis show that the CBN sold $2.6 billion through the RDAS sessions in November, down by 13 percent from $3 billion sold in October.

Consequently the CBN has sold $31.7 billion through the RDAS sessions in 2014, representing 24.9 percent higher than the $25.37 billion sold in 2013. This however excludes direct dollar sales by the CBN to banks to intervene in the interbank market.

N415bn inflow deflates cost of funds

Cost of lending in the interbank money market fell by 800 basis points following inflow of N415 billion from matured treasury bills.

On Wednesday, the CBN debited banks for the increase in CRR to 20 percent from 15 percent announced on Tuesday. This led to the outflow of about N500 billion from the interbank money market, prompting sharp increase in cost of lending.

As a result, average short term interbank interest rates rose from 10.3 percent the previous week to 20.65 percent on Wednesday.

However on Thursday, the market experienced inflow of N415 billion as a result of payment for matured treasury bills. The inflow prompted sharp decline in cost of funds between Thursday and Friday, with average short term rates closing at 11.73 percent.


— Vanguard

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