21 December 2014, Lagos – Worried by the continuous volatility of the naira resulting from falling oil prices, the Central Bank of Nigeria (CBN) on Thursday reviewed temporarily the foreign exchange trading position of individual authorised dealers to zero per cent of banks’ shareholders’ funds unimpaired by losses.
Until Thursday, the forex trading position of the dealers used to be one per cent of shareholders’ funds.
The CBN, which said the move was also to preserve the stability of the forex market, announced the review in a circular posted on its website. The circular was signed by the bank’s Director, Trade and Exchange Department, Olakanmi Gbadamosi.
CBN Governor, Mr. Godwin Emefiele, told Reuters that the latest policy would help end speculative pressure on the naira.
Emefiele said he believed the current naira band, set last month, was “appropriately priced at this time”, signalling a will to defend the currency, although it is currently trading below the band.
“We do not want speculators in this market any longer,” he said.
“The banks are not supposed to hold any funds (in dollars) of their own. They are supposed to buy and sell currency on behalf of customers.”
The naira has been battered in recent months by the plunging oil price.
The CBN had last month moved the mid-point of the official window from N155/$1 to N168/$1. In addition, it widened the band around the mid-point by 200 basis points from +/-3 per cent to +/-5 per cent. The central bank also increased the monetary policy rate (MPR) from 12 per cent to 13 per cent, while the cash reserve ratio (CRR) on private sector deposits was also raised from 15 per cent to 20 per cent.
Asked whether or not the bank would devalue again, Emefiele said: “As the need arises, action will be taken. But we believe the currency is appropriately priced at this time.”
The naira fell to a record low of N188.85 to the dollar after the governor’s comments, well outside the bank’s target band.
“We are seeing some elements of speculation in the market by some banks which think the level will re-adjust further, and that is not our view,” Emefiele added. Continuing, the central bank in the latest circular directed authorised dealers to “maintain zero per cent of their shareholders’ fund as forex trading position at the close of each business day.
“Any infraction of the requirement of this circular, in any way whatsoever will attract appropriate sanctions, which may include suspension from the forex market.”
But despite the new restrictions imposed overnight, Emefiele said the bank wanted to reassure the market that, “if there is genuine demand … for dollars for legitimate purposes … it will be met”.
Brent crude recovered three per cent to above $63 a barrel yesterday, extending a rebound from five-year low this week but it has nearly halved since June, posing challenges for Nigeria.
Meanwhile, Bloomberg revealed that dealers halted trading after the policy was announced as the plunging naira confused investors.
“This raises concerns about the credibility of the central bank,” Senior Portfolio Manager at Aberdeen Asset Management Plc, Kevin Daly said.
“If it was their intention to stabilise or see some appreciation of the naira, it’s backfired.”
Interbank naira trading ground to a halt, according to Head of African Strategy at Standard Chartered Plc, Samir Gadio.
“Banks have to sell all dollars they buy from the market, not to keep them until the following day,” CBN Deputy Governor, Dr. Sarah Alade told Bloomberg.