Nigeria’s central bank unofficially devalues the Naira

Determined to bring sanity into the foreign exchange market, the Central Bank of Nigeria (CBN) has scrapped the Retail Dutch Auction (RDAS) market and told dealers that it will be selling dollars at the interbank at N198.

CBN had spent an average of $200 million daily to cover the surging dollar demand and on more than one occasion shut down electronic trading of the naira.

The development regarded as a tacit devaluation of the naira by some analysts, is also seen as another move to check widespread arbitrage of N46 existing between the official rate of N168/$ and the parallel market rate of N214/$ as at the time of writing.

“With reserves declining every day and seen to affect the nation’s ratings, the central bank took the right decision,” Sewa Wusu, head of research at Sterling Capital Markets Ltd., said in a phone interview with Bloomberg.

The move amounts to “a tactical devaluation of the local unit, without having to make the announcement,” he said.

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CBN depleted reserves to their lowest in more than three years to defend the naira. The central bank’s official target band for the currency is 159.6 to 176.4 per dollar, though it sold $401 million at 198.5 per dollar in an unscheduled auction last week to help stem the naira’s rout.

Market analysts have long predicted that a further devaluation was inevitable.

“Since the November devaluation, the oil price has dropped by 35 percent, to $50/ per barrel, and the spread between the DAS exchange rate and the interbank rate is even wider than it was during the global crisis. We think this implies another devaluation is likely in the short term,” according to Renaissance Capital in its January 7 note.

The naira has lost about 17 percent since the official devaluation shifted the midpoint from N155 to N168, with a wider band of +/- 5 percent has become a managed float with the CBN intervening in interbank market when there is volatility.

Implications

Manufacturers said after the CBN decisions that the action is capable of destroying the sector that is currently reeling under different challenges.

“Given the fact that oil prices are falling, we all say there is the need to diversify the economy. But how can you diversify without manufacturing,” says Frank S.U. Jacobs, president, Manufacturers Association (MAN).

Ayodeji Ebo, Head, Investment Research, Afrinvest Securities limited  said, “We expect this decision to increase the cost of imported inputs for the FMGCs, as input cost increases, hence reduced profit margin. Investors are expected to price-in the new development into the share prices of the FMGCs when taking investment decisions.”

Nigeria’s foreign exchange reserves stood at $32.7 billion as of Feb. 16, down 22 percent on a year ago.

Demand and Supply

Johnson Chukwu, managing director, Cowry Asset Management limited, said the “closure implies the introduction of a floating exchange rate regime for the naira. With this policy, the exchange rate will now be largely determined by the forces of demand and supply, with the CBN intervening to correct market imperfections.

“However, given the structure of the Nigerian economy, where 90 percent of our foreign exchange earnings come from crude oil sales, which are received by the CBN, it will still maintain a near monopoly position in the supply of forex to the interbank market.

The benefit of this policy is that the economic rent, subsidy and arbitrage which a few economic agents have been enjoying from accessing funds via the official window have now been eliminated.”

JOSEPHINE OKOJIE