Gabriel Omoh, Babajide Komolafe & Emma Aziken
17 December 2008
Lagos — THE inter-bank foreign exchange market reopened briefly yesterday after virtually shutting down two weeks ago due to dollar scarcity, even as the naira appreciated by 150 kobo against the dollar at the official market to sell at N134 to the dollar.
This is coming on the heels of the Central Bank (CBN) Governor, Professor Chukwuma Soludo's appearance at the Senate yesterday to explain the declining fortune of the naira to Senators.
"The market reopened briefly for 15 minutes today, but only a few banks were willing to give quotes," one dealer said.
Soludo told the Senate that the naira had begun to stabilise in the foreign exchange market, after government met recent strong demand for dollars from importers, banks and global investors. Professor Soludo said dollar demand in the interbank foreign exchange market declined to around $72 million yesterday from over a $1 billion last week.
At the Dutch auction yesterday, the naira gained 150 kobo at the close of business as the official exchange rate appreciated to N134 per dollar from N135.5 per dollar on Monday. Investigation revealed that demand for foreign exchange at the bi-weekly auction session conducted yesterday stood at $72 million while the CBN sold $62 million, about $10million short of total demand.
The interbank foreign exchange market collapsed about three weeks ago following scarcity of foreign exchange which triggered off crisis of confidence in the market.
Vanguard reliably gathered that with CBN meeting substantial amount of forex demand in recent times, interbank operators had hoped that activities would resume in the market yesterday.
"If we open for a longer time, the rate might go up sharply," another dealer said. "We will continue to trade around the Central Bank's rate until other dollar supply sources improve," a Trader said
Investigations, however, revealed that the banks are yet to sign one of the documents critical to the resumption of the market and this has to be done to address the problem of risk settlement plaguing the market since the decline in foreign exchange in the market.
Professor Soludo at the Senate said: "We have met the demand in the market. As of today, the rate has just appreciated because there is a decline in demand."
Noting that Nigeria faced almost similar experience in 1981 when the Shagari government introduced austerity measures including import restriction to check the plummet of crude oil prices, he said government this time prepared better by applying foreign exchange movements to check impending harm.
In checking the potential dangers from speculation on the naira and other foreign exchange flight, he said the Central Bank resorted to a mop-up of hundreds of billions of naira from circulation, an action he said forced down demand for dollar from a high of more than $1 billion in late November to $72 million yesterday at the CBN foreign exchange market.
His words: "Every country that experiences that, you have two options: you either allow the prices to adjust by way of exchange rate or quantities would adjust.
The quantity that will adjust would either mean that you cut down on domestic consumption, domestic investment and government spending in order to retain pressure on the external sector or you allow the price to do the readjusting. Generally, the exchange rate responds to several factors. Currently, we operate a flexible exchange rate regime as most economies of the world.
This is actually determined by the demand and supply in the market. If you have an increasing supply of foreign exchange, the exchange rate appreciates."
Noting the apex bank's efforts at reducing the volume of naira in circulation, he said: "We have already sucked quite a lot of hundreds of billions of naira from circulation as a consequence because of the heightened demand.
I think sometime last week there was some demand of about $1.4 billion and people were willing to pay as high as N136.5 and who are we to say if people are willing to pay that much, that they needed it, that they wanted to have it why would you go to sell it at a much cheaper rate? Who benefits? You are simply subsidizing them.
"But now that we have sucked much of that out, we are already beginning to see some billions. As at the ending of November, the daily demand at the Forex market was coming to over $1 billion. The demand yesterday (Monday) was about $257 million and the demand for today (yesterday) was about $72 million," he said as he noted that "the measures have even helped to make the naira appreciate in the market.
"We have sucked out much of the naira and I think much of those speculative demands in the market are now much lower and the rate is beginning to come down," he added.
"Those who want to speculate on the naira would be made to endure heavy losses and those who were making all those huge bids, they want to pay whatever, we will give it to them at that price but when the naira is all sucked out the rate will now stabilise at the rate where it should settle and we are already beginning to see that downward trend from what it was a few days ago.
The market will work and we are going to have a stable exchange rate regime," he said.
Analysts said it was in Nigeria's interests for the local currency to fall as it tries to mitigate the effects of lower global demand for crude, which is eating into its foreign earnings. A weaker naira gives the government greater spending power in naira terms for every dollar earned, helping to manage a widening deficit.
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