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More pressure on naira as market loses $800m

By on February 24, 2015

The removal of about $800m from the foreign exchange market following the closure of the Retail Dutch Auction System and Wholesale Dutch Auction System window by the Central Bank of Nigeria will put further pressure on the naira, analysts have said.

In a move to calm the forex market, the CBN on Wednesday closed its official window to avert the emergence of multiple exchange rate regime and preserve the country’s foreign reserves. It stated that all forex demands should be channelled to the interbank market.

The closure of the RDAS has been described by analysts as an implicit or tacit devaluation of the naira, with the CBN now selling dollars to banks above the official rate. The CBN on Monday last week had sold a dollar N30 above its N168 (+/-5 per cent) rate.

While the move had been adjudged as a welcome development as it would stop further depletion of the country’s forex reserves, analysts said it did not mean that the naira’s weakness had ended.

Analysts at Ecobank’s Economics Research Desk, headed by Mr. Angus Downie, said, “Closing the RDAS window immediately removes $600-$800m from the foreign exchange market each week, which will significantly add pressure on the naira to weaken further given strong US dollar demand.”

They however noted that the CBN had advised that it would continue to intervene in the interbank foreign exchange market, selling the US dollar when it considered it necessary, adding that expectations by some in the market that the naira could weaken sharply appeared overblown.

“This latest development reflects the CBN’s long-held view that it would eventually seek to remove itself as one of the largest suppliers of foreign exchange to the market as well as the main price setter – as part of a broader aim of gradually moving exchange rate policy from a managed float to a free float regime.

“The move comes at a time of heightened currency pressures driven by the collapse in oil prices, which could undermine efforts to develop exchange rate policy and strengthen the market overall,” the Ecobank analysts said.

Although the CBN is expected to inject the US dollar when it considers it necessary, the dollar liquidity will shrink due to insufficient supply, according to the analysts.

They said the foreign exchange market was likely to price the naira significantly weaker, with a new, temporary market clearing price of around N210 or higher.

Analysts at Renaissance Capital Limited said the devaluation would significantly lower the risk of soft capital controls and aggressive rate hikes, “but does not spell the end of naira weakness, in our view.”

They stated that the naira devaluation implied inflation would continue to accelerate in the coming months into the lower double-digits.

 

[Punch]