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CBN defends naira with $6.4bn in eight weeks

By BusinessNews Staff on March 4, 2014

In a bid to prevent the naira’s value from crashing, the Central Bank of Nigeria has offered a total of $6.4bn to foreign exchange dealers at its twice-weekly regulated auction in the eight weeks, according to its latest statistics.

Data on the agency’s website indicated that the CBN offered the amount in 16 auctions between January and February this year.

The CBN offered $350m, $400m, $350m, $350, $350m $400, $400m and $400m, respectively on January 6, 8, 13, 15, 20, 22, 27 and 29.

Also, the central bank offered $400m, $400m, $400m, $400m, $600m, $400, $400 and $400m on February 3, 5, 10, 12, 18, 19, 24 and 26, respectively.

To save the naira from devaluation last year, the CBN defended the currency with approximately $26.6bn from the nation’s external reserves.

The bank sold about $26.6bn to currency dealers in 94 Foreign Exchange Dutch Auctions between January and December 2013.

According to the data, the central bank sold about $19.8bn to currency dealers in 72 auctions through the Wholesale Dutch Auction System between January and September last year, while it offered $6.8bn to the dealers in 22 auctions through the Retail Dutch Auction System between October and December.

The CBN had on October 2 last year replaced the WDAS with the RDAS because of the ineffectiveness of the former in order to address hitches in the foreign exchange market.

The data showed that the central bank sold the highest amount of dollar in the month of July, offering $3.3bn; while it sold $833,501,279 in January, the least for the year

A new report by the Nigeria-based Financial Derivatives Company Limited has indicated that the CBN will devalue the naira within the next 18 months.

The Managing Director, FDC, Mr. Bismark Rewane, in the latest edition of its bi-monthly Business and Economic Update, noted that the nation’s external reserves had “fallen below the psychological resistance level of $41bn because of the increased frequency and magnitude of the CBN intervention in support of the naira.”

The turmoil, according to the report, has been exacerbated by the “unprecedented and unusual removal of the CBN governor.”

According to the report, the naira has been under speculative attack in the past four months.

The report read in part, “With this level of external reserves, Bank of America has downgraded the Nigerian currency-linked instruments on fears of further value haemorrhage in the market. A naira adjustment is only a question of time.

“Historically, exchange rate adjustments in Nigeria have always been a result of involuntary policy actions. Whilst a strong naira is a ‘good to have,’ a realistically valued naira is a ‘need to have.’

“Although we are convinced that a naira adjustment will take place during the next 18 months, predicting the timing of it is trickier.”

The FDC report explained the CBN may either devalue the naira shortly after the nominated CBN Governor, Mr. Godwin Emefiele, resumes office in June or he may postpone the decision after the elections in February 2015.

Also, a report by the Bank of America Merrill Lynch Global Research had last week predicted that the naira may weaken for the current levels of over N160 to N170.

The report noted that although the CBN had the political will to defend the naira, the dwindling amount in the reserves may undermine this effort.

The report read in part, “We believe that the political will to defend the naira is high, but the running down of reserves will weigh on external debt performance. We recommend an underweight position. Despite our expectation of tighter monetary policy this year, we still forecast the naira to weaken further to average N170 in 2014.

According to the BofA Merrill Lynch report, signs of stress are already evident in the dollar-naira street rate, noting that the decision of President Goodluck Jonathan to suspend the CBN Governor Lamido Sanusi had raised the risk premium on Nigerian assets.

The increasing divergence between the official interbank dollar-naira rate and the parallel market, represented by the street rate, has been in part driven by the CBN restrictions on the operations of the Bureaux de Changes, which recently have been removed, according to analysts.

[Punch]

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