The plan by the Central Bank of Nigeria (CBN) to reintroduce the retail Dutch auction on Wednesday is seen as capable of supporting the naira stability and stemming devaluation.
The apex bank plans to sell dollars in a retail auction this week. The action is aimed at easing the mounting pressure on the local currency and stabilising the foreign exchange market.
Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, explained that the reintroduction aims 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 CBN has called on authorized dealer banks to compile and submit a list of all outstanding FX demands by end users.
“The CBN will undertake a Retail Dutch Auction System to mitigate the demand for eligible transactions,” the circular stated. The reintroduced retail forex auction is scheduled for August 7.
The naira has recently faced significant pressure due to seasonal demand from summer tourists and importers. On Friday, the currency lost 2.9 percent to closed at N1,617/$, according to data from FMDQ, as compiled by Bloomberg. Over the past year, the naira has declined by approximately 70 percent, following reforms intended to allow it to trade freely and attract foreign inflows.
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.
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