19 February 2015, Abuja – The Central Bank of Nigeria, CBN, Wednesday, in a bid to salvage the Naira from speculators scrapped the official window where it sells dollar to end users through banks twice a week.
The Naira will now be sold at the ruling inter-bank market rate indicating an implicit devaluation of the currency. The Naira yesterday at the inter-bank market sold for N197 to the dollar.
Financial Market Dealers Quote, FMDQ, a group comprising Nigeria’s main commercial banks and the central bank, said commercial banks have also been banned from re-selling CBN dollars to other banks, another attempt to end speculation in the naira.
The CBN had at the liberalization of the economy opened the Whole Sale Dutch Auction but later replaced it with the Retail Dutch Auction System where banks bid for foreign exchange on behalf of their customers.
Scrapping its window of direct sale of foreign exchange
The CBN in scrapping its window of direct sale of foreign exchange to end users said all foreign exchange needs are to be sourced from the inter-bank market whose rate is N197 to a dollar.
This implies that Nigerians who need foreign exchange will now approach their banks and buy at the ruling rate. There had been about three different markets for purchasing foreign currency in the country.
These are the CBN window called the Retail Dutch Auction System, where the CBN sell dollars to end users twice a week at a much cheaper rate, the inter-bank where banks sell foreign exchange independently sourced by them at a higher rate, the bureau de change which margin is slightly higher than that of CBN, and the open market where small retailers sell forex on the streets at a more higher rate.
The existence of several markets has always given the impression that the Naira is over valued and some form of subsidy where those who buy from CBN sold at higher rate at the inter-bank market called round tripping.
The apex bank in a statement signed by its Director of Communication, Mr Ibrahim Mu’azu, yesterday said: “The managed float exchange rate regime, which the bank had adopted following the liberalisation of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate.
“In recent times, 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 inter-bank and the RDAS window, thus engendering undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.
“This 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 Retail Dutch Auction System (RDAS/WDAS) foreign exchange window at the CBN is hereby closed. Henceforth, all demand for foreign exchange should be channelled to the Interbank Foreign Exchange Market. For the avoidance of doubt, all authorized dealers and the general public should note that the CBN will continue to intervene in the inter-bank foreign exchange market to meet genuine/legitimate demands.
Nigeria’s foreign exchange reserves, which was $5.4 billion in 1999, rose to an overwhelming level of $51.3 billion at end of 2007 and further to $53.0 billion in 2008, but owing to the crash in the international price of crude oil in 2008 and the aftermath of the global financial crisis, the reserve declined to $42.4 billion in 2009 further declined from $38.138 billion at the end of April 2014 to $33.04 billion in February 2015.
Reacting to the development, market operators welcomed the CBN action, saying it is long over due.
Mr. Bismarck Rewane, Managing Director/Chief Executive, Financial Derivative Company Limited said: “This means that the Naira is now priced at its fair value. It is one of the best moves the CBN has made in terms of stopping this nonsense that is going on at RDAS or no RDAS. It is now time to price the market at its fair value and take away all the middlemen and round tripping.
“So this is the true value of the currency, the speculators are out of business. Hitherto, products were not priced at RDAS window. For example airline tickets have been priced at N202 per dollar for the past six weeks. So what are we talking about? As a matter of fact, because the price is now high the demand will reduce and the currency will now have some respite.
Speaking for the organized private sector, Director General, Lagos Chamber of Commerce and Industry, Mr Muda Yusuf said: “The closure of the RDAS foreign exchange window has the following implications: It will result in the escalation of production costs for firms that had access to this forex window. Such firms will experience cost increases of up to 20 per cent.
“This will also impact on sales performance, profit margins and ultimately capacity utilization of manufacturing firms. Import duty and other port charges which are computed as a percentage of import costs will also increase. This implies additional pressure on operating costs for erstwhile beneficiaries of the CBN RDAS forex window. Firms funding requirements (in naira) will increase as firms will need to source more funds in the banks to fund their forex needs.
On his part, Razia Khan, Managing Director, Head, Macro Global Research, Standard Bank said: “With Nigeria foreign reserves under pressure, and amid growing concern that a wide RDAS-inter-bank spread would encourage ‘round-tripping’, the CBN will now stop RDAS auctions, effectively discontinuing its foreign exchange subsidy for certain categories of demand. This is positive news, and should help create more transparency in the Nigerian market. However, with oil prices currently at levels where foreign reserves will be difficult to replenish, the CBN’s appetite for continued support of the inter-bank foreign exchange rate will be closely monitored.
Kunle Ezun, a currency analyst said: “This is implicit devaluation. There won’t be any change in the inter-bank market rate because since last week, this is what the CBN has been doing. Also this is what the market actually advised them to do. They advised the CBN, you can’t keep subsidising the naira in RDAS, why don’t you put everybody on the same platform.”