The naira recorded its single day appreciation of 430 kobo in the interbank market on Friday following the adoption of a new strategy by the Central Bank of Nigeria (CBN) to intervene in the foreign exchange market.
The new method which cut foreign exchange dealers napping caused the interbank foreign exchange rate to drop sharply to N165.8 to the dollar at the close of business on Friday from N170.1 to the dollar on Thursday.
Hitherto, the CBN intervened by selling specific amount of dollars to each banks at specified exchange rate. But on Friday, the apex bank changed its strategy, by asking banks to supply their buy and sell rate for different amount of foreign exchange (i.e. $0 to $20 million, $21 million to $40 million etc), insisting that the difference between the two rates must not be more than 50 kobo. Upon receiving the quote for each bank, the CBN then decided the amount of dollars it would sell to each bank. By so doing the CBN injected huge amount of foreign exchange into the interbank market.naira-Dollar
Recall that the CBN had last week banned banks from selling dollars purchased through it’s intervention sales to each other, or to bureaus de change. It also imposed a limit of 10 kobo margin on sale of such dollars to customers, and that such dollars must be returned within two days if they are not sold by the banks. These measures coupled with the huge volume of dollars sold by the apex bank on Friday, forced banks to reduce their interbank exchange rate quotes. The CBN however, allowed the naira to depreciate marginally by four kobo at the official market last week, moving the official exchange rate to N155.8 to the dollar from N155.76 the previous week.
External reserve drops to $38bn
The huge dollar sale by the CBN however impacted severely on the nations’ external reserve during the week. The reserve fell consistently from Monday to Thursday, shedding $690 million, as it fell to $38.07 billion from $38.76 at the end of October. Consequently the external reserve had fallen by $5.83 billion from $43.93 at the end of last year.
This sharp fall in external reserve is driven by increased dollar sales by the CBN in its effort to defend the naira against the dollar. This is reflected in the amount of dollars sold through the bi-weekly RDAS foreign exchange sales, which showed that the CBN as at last week has sold $29.9 billion through RDAS this year. This translates to 16 percent increase when compared with the $25.67 billion sold in the whole 2013. But with price of crude oil falling by 23 percent in the last five months and still projected to fall, apprehension over the impact of the falling prices on accretion to the external reserve has caused foreign investors to believe that the naira would depreciate despite assurances by the CBN to defend the naira.
Further depreciation inevitable -Dealers
Despite the appreciation of the naira in the interbank on Friday, foreign exchange dealers however told Vanguard that further depreciation of the naira in the interbank market is inevitable. Speaking on condition of anonymity, the Treasurer of a bank with international afflictions said, “We expect further depreciation. Foreign investors no longer believe in the CBN’s rhetoric of defending the naira. Everybody can see the factors and it is obvious that defending the naira as insisted by the CBN is not possible, and as a result confidence in the CBN in this regard is waning”, he said.
A market analyst who does not want his name mentioned told Vanguard that it would be difficult to maintain the appreciation of the naira in the interbank on Friday. He said the only way this could be achieved is for the CBN to continuously intervene in the market with huge dollar sales for about a week, adding that this however will affect the external reserves. “Definitely, we would see more naira depreciation. I think what they (CBN) are trying to do is to avoid the kind of devaluation that happened in 2008,” he said.
These views were corroborated by the Ecobank Group Research team in the Middle Africa Briefing Note titled, “Nigeria: Naira Devaluation by Default?” issued on Friday. They predicted a 15 percent devaluation of the naira in the weeks ahead. They said, “On 6 November, the central bank issued two circulars to separately address naira (NGN) volatility and unlock money market funds to productive sectors of the economy.
The CBN’s actions are aimed at addressing NGN pressures that have increased significantly in recent weeks. The NGN will come under further pressure in the interbank market owing to strong dollar demand, the recent sharp fall in Brent oil prices (down 23% since late June), and uncertainty over the effect of normalisation.
Recent developments suggest an implicit devaluation has taken place but this needs to be confirmed based on developments next week. Due to the bearish outlook for oil prices, the CBN is under growing pressure to continue supplying dollars to support the +/-3% N155 exchange rate given. We expect a devaluation of up to 15 percent is likely in the weeks ahead, which would be around half the scale of the 27 percent devaluation that occurred in November 2008.
New policy triggers 196 percent oversubscription for TBs
In another development, treasury bills (government security) offered by the CBN last week recorded 196 percent oversubscription due to the new interest rate policy on CBN’s Standing Deposit Facility announced on Thursday.
Though the CBN offered N313 billion worth of treasury bills (TBs), total subscription was N928 billion, while amount allotted (sold) was N718 billion worth of bills. The oversubscription was more pronounced on Friday, the day after the new policy was announced.
According to the new policy, banks should not deposit more than N7.5 billion of their idle cash with the CBN. The CBN said it would no longer pay interest rate on any excess cash deposited by banks that is in excess of N7.5 billion. This limit according to a circular titled “Re: Guidelines on accessing the CBN Standing Deposit Facility”, was introduced to discourage banks from depositing their excess cash with it instead of lending it to each other in the interbank market.
The CBN said, “It has been observed that banks and discount houses have preference for keeping their idle balances (cash) at the Central Bank of Nigeria in the Standing Deposit Facility (SDF) thereby constraining the process of financial intermediation. In order to encourage the banks to increase lending to the productive sector of the economy, the guidelines for the operations of the SDF is hereby reviewed”.


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