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CBN compels banks to buy dollars to halt naira depreciation

By on September 3, 2013

The Central Bank of Nigeria (CBN) on Friday compelled banks to buy dollars at N160.5 per dollar, in a bid to halt the four day depreciation of the naira at the interbank foreign exchange market. The unusual intervention forced the interbank exchange rate to N162.05 per dollar on Friday from N163.7 per dollar on Thursday, translating to 165 kobo appreciation for the naira.

This was in sharp contrast to the steady depreciation suffered by the naira from Monday to Thursday. From N161.47 per dollar the previous week, the naira depreciated by 183 kobo to N163.7 on Thursday.

Miffed by this trend, and the likelihood that it would persist, the CBN entered the interbank market selling dollars to banks. Investigation revealed that the intervention was conducted between 1pm and 1.30 pm, just before the market closed by 2pm. Foreign exchange dealers who confirmed this development to Vanguard, under condition of anonymity, said the apex bank came in heavily, and practically forced dollars on banks.

According to them, unlike previous interventions, where the apex bank usually request for banks’ two way exchange rate quote, and sell to banks with attractive exchange rate, this time, the apex bank just called each bank, and sold specific amount of dollars at specific exchange rate, ranging from N160 per dollar and N160.5 per dollar.

Although, the depreciation of the naira commenced on Monday, it aggravated on Thursday as the interbank rate rose from N162.275 per dollar to N163.7 per dollar, translating to 162.5 kobo depreciation.

Foreign Exchange Dealers told Vanguard that, the market expected the CBN to intervene on Thursday and as a result most banks sold significant portion of their dollar stock, with the expectation of replenishing it with cheap dollars from the CBN. But the apex bank did not intervene as expected on Thursday, and this left many banks with vulnerable dollar positions. This prompted flurry of demand, which triggered the depreciation of the naira at the close of business on Thursday.

Dealers however expressed satisfaction with the intervention, saying it is good for the market. “At the end of the day, everybody made money, and the market is stabilised”, a dealer, who spoke under anonymity, told Vanguard.

But a bank executive described the stability as artificial. Speaking he said, “It would have been good for the CBN to stop artificial fixing of the exchange rate and allow the naira to find its true level. But the action of the apex bank is necessary for economic security. If the CBN allows the naira to depreciate by ten per cent, the first thing that will happen is that prices will go up, the pump price of petroleum products will also rise, and this will further aggravate the rise in prices, the result would be mass protest across the nation. So we are buying economic security by fixing the naira artificially.”