Ayodele Aminu
4 December 2008
Lagos — The Central Bank of Nigeria (CBN) is set to intervene in the foreign exchange market where the Nigerian currency, the naira, lost N7.86 against the United States dollar yesterday at the official market - Wholesale Dutch Auction System (WDAS) - moderated by the banking watchdog.
CBN Governor, Prof. Chukwuma Soludo, who made this known to THISDAY last night, asked forex end users and banks not to panic, stressing that the "CBN would meet all the demand at the market determined rate".
To douse the pent-up pressure in the foreign exchange market, he said effective from today, the CBN will get back into the inter-bank market and participate in the two-way quote, where a dealer gives a foreign exchange quote in which he indicates the price he is willing to buy and sell.
This is expected to have a calming effect on the market as the CBN would be able to pump enough dollars into it.
While insisting that there was no cause for alarm, he said stability of the naira exchange rate remains the CBN's top priority.
He said currency speculators, especially those who speculate on the naira, would "pay dearly" for it, declaring that the CBN would make them incur heavy losses.
"There is absolutely no cause for panic. We have all it takes to meet all the demands in the market. And for those who are speculating on the naira, we would make them incur huge losses," he assured.
Soludo said the apex bank would become very active in the market by making sure that there is adequate supply of dollars in the market to meet demands, which has increased significantly lately as foreign exchange end users take year-end positions to pre-empt any major government policy shift that may arise early next year.
"The market will stabilise. We (CBN) will intervene heavily in the market and there would be adequate supply of foreign exchange because we would be very active in the market," Soludo said.
The CBN, which has lately become the major source of foreign exchange supplier to the market because of the dearth of dollars at the inter-bank market, was a fringe player before the global financial meltdown, which has seen developed countries injecting several trillions of dollars to save their financial system from collapse.
The naira, which had lost a total of N9.89 against the United States dollar within the last one week at the official market, having shed 4 kobo and N1.11 last Wednesday and Monday respectively opened before losing N7.86 yesterday, has been under tremendous pressure lately because the CBN, which is the major player in the market, could not meet demand.
The dearth of dollars at the official foreign exchange market had also triggered depreciation at both the black market (unofficial market) and inter-bank market (where banks buy foreign exchange from one another on behalf of their customers to meet their daily needs).
At the inter-bank market, which was completely shut down yesterday as there was no dollar to trade, the naira, which opened for trading at the inter-bank market last Monday at N119.50: $1, had depreciated to an all-year low at N126.50: $1, translating to N7 depreciation against the dollar.
Ditto for the black market where the naira lost N5.50 to trade at N128:$1 as against the previous day's N122.50:$1.
CBN has been rationalising the sale of dollars since last week Monday when it sold 30 per cent of the total demand. It also sold 10 per cent last Wednesday before selling 10.3 per cent of the total demand last Monday. THISDAY also gathered that the CBN sold only $180 million yesterday out of over one billion dollars, which was demanded by foreign exchange users.
Commenting on these developments, a top CBN official attributed the depreciation of the naira to the continuous depletion in the nation's external reserve, which was triggered by the plummeting price of oil at the international market.
He explained that since the CBN was "applying three months forward rate (about $100 per barrel) and the price of oil has gone below $50 per barrel, the accretion (that is inflow and outflow) to reserve will definitely be lower".
The CBN official said "by the end of January, the situation may be worse because the nation is getting lower foreign exchange inflow than it bargained for".
He also attributed the slump of the naira to the lingering financial crisis, which is now taking its toll on Nigerian banks as they could not get enough dollars for their transactions with their foreign counterparts and now demand foreign exchange from the WDAS to meet their demands.
Besides, he said owing to the financial crisis, foreign direct investment is not flowing in as before and that some foreign investors that moved are divesting portions of their dollar investment in the economy.
"The global financial crisis is also a factor. There are no more FDI flowing in, people are divesting. Banks are now coming to WDAS for dollars and demands are increasing unlike before. Banks are not getting dollars from their foreign counterparts because of the financial crisis," he said.
The decision of the CBN to rationalise sale of foreign exchange, according to market operators, was interpreted to mean that the CBN would encourage some devaluation and look to preserve foreign reserves.
Over the past four months, the apex bank had become by far the largest supplier of foreign exchange in the domestic market, controlling almost 90 per cent of total supply as against 10 per cent in the first quarter of the year.
Other supply sources especially foreign direct and portfolio investments: home remittances (Western Union etc) have since dried up as a result of the global liquidity and credit crises.
"Unfortunately, this dry up in supply is coming at a time when letters of credit established 120 days ago are now maturing and due to be paid especially when you consider that commodity prices were at their highest levels then.
"Given that the CBN is now rationalising the sale of dollars and is virtually impossible to restructure the maturing letters of credit with offshore counterparties due to the global crisis, banks then have to scramble for dollars thereby pushing up the prices," a market analyst told THISDAY.
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