The Central Bank of Nigeria (CBN) will be hoping it can halt the naira’s downward spiral by selling dollars at a retail auction today.
The apex bank has received a list of all outstanding FX demand by end users from authorised dealer banks, after telling banks in a circular that it was diverging from the usual wholesale auctions to banks.
Sources say the CBN has been confounded by the naira’s rapid fall despite its increased interventions in the foreign exchange market.
According to FMDQ data, the bank sold $369 million in the month of July, while buying less than $20 million from the deposit money banks.
The CBN’s intervention has not brought the much-desired relief for the naira, causing the CBN to change tack with a retail auction.
The naira slipped below N1,600 last month, a record low. On Tuesday, the naira closed at N1601 per US dollar. It has declined by 70 percent over the past year.
The bank is also attempting to mop up some more naira liquidity with the retail auction, some traders said.
Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, explained that the CBN’s change of tack is to meet the burgeoning forex demand and stabilise the currency.
Olubunmi noted that the CBN’s decision is a revival of a previously utilised system designed to ensure legitimate forex transactions are met.
“The CBN has been trying to reduce activities on the forex window,” he said, “but the reality is that the CBN will actually be the main supplier. They are creating this particular window to ensure that the naira stabilises.”
He emphasised that the high demand for dollars has prompted the CBN to take multiple measures, including selling dollars to Bureau De Change (BDC) operators to alleviate pressure on the naira. The step is crucial to prevent the naira’s devaluation, he noted.
“The reality is that the CBN will still be the main supplier of forex,” Olubunmi reiterated. “Reintroducing the retail Dutch auction will support the naira and stem devaluation.”
According to a circular issued by the CBN, the upcoming sale is in response to the “growing unmet foreign exchange demand,” which has exacerbated pressure on the naira’s exchange rate.
The naira is also facing significant pressure due to seasonal demand from summer tourists and importers.
Historically, the central bank has utilised both retail and wholesale currency auctions to supply dollars to the market. The retail auction directly serves customers, while the wholesale auction provides dollars to banks.
SOURCE: Businessday
