The Central Bank of Nigeria (CBN) has closed its Retail Dutch Auction (RDAs) under which foreign exchange was previously sold at a subsidised rate, and directed that all foreign exchange demand be met via the interbank market.
A statement from the Financial Markets Dealers Association of Nigeria (FMDQ), a group comprising Nigeria’s main commercial banks and the central bank, was reported by Reuters as saying commercial banks had also been banned from re-selling central bank dollars among themselves, another attempt to end speculation in the naira.
Most analysts were not surprised by the move, given recent pressures on the exchange rate. ‘Yesterday [February 17] we suggested that the CBN was trying to manage expectations of another devaluation following CBN selling N30 above its N168 (+/-5 percent) rate on Monday [February 16],’ an analyst with Ecobank said in a comment emailed to AfricaBriefing.
Closing the RDAs window immediately removes $600-800 million from the foreign exchange market which will significantly add pressure on the naira to weaken further given strong dollar demand, ‘Nonetheless the CBN has advised that it will continue to intervene in the interbank foreign exchange market, selling dollars when it considers it necessary. Therefore, the expectation by some in the market that the naira could weaken sharply appear overblown,’ the analyst said.
The 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.
Razia Khan, head of Africa research at Standard Chartered Bank in London, expressed a similar reaction, saying with the Nigerian foreign exchange reserves under pressure as a result of weaker oil prices, markets had anticipated eventual unification of the country’s different exchange rates. ‘Following the announcement in February that presidential and parliamentary elections would be postponed to 28 March, Nigerian markets were subject to greater volatility,’ she said.
Naira losses were frequently large enough to trigger a daily shutdown of the country’s foreign exchange market. In response to these pressures, the CBN intervened directly through special auctions, filling demand for foreign exchange directly, but at a much higher dollar-naira exchange rate than that prevailing at the bi-weekly official retail Dutch auctions. With foreign exchange reserves under pressure, and amid growing concern that a wide RDAs-interbank spread would encourage ‘round-tripping’, the CBN will now stop RDAs auctions, effectively discontinuing its foreign exchange subsidy for certain categories of demand.
Hailing the move as positive news, Khan said it should ‘help create more transparency in the Nigerian market. However, with prices currently at levels where foreign reserves will be difficult to replenish, the CBN’s appetite for continued support of the interbank foreign exchange rate will be closely monitored.’