CBN in damage control of failing FX policy with $500mn auction today

The Central Bank of Nigeria’s (CBN) policy of capping the foreign exchange rate through tight management of the dollar – naira peg at near N305/US$ is backfiring, as supply shrinks and backlogs build.
To help clear some of the backlog, the CBN is selling $500 m of foreign exchange forwards reserved for manufacturers to import input materials.
But analysts warn that adhoc interventions by the CBN in the foreign exchange markets will not boost confidence and improve liquidity, while rigging the market as is happening, will ensure no one is bringing in the much needed dollars, even as the CBN does not have enough dollar firepower to satisfy demand.
“Post devaluation policy mistakes have undone the initial good work. There has emerged a more serious crisis of confidence over the foreign exchange market,” said David Cowen, Africa economist at Citibank.
The CBN gross dollar reserves fell to $23.95 billion as of Oct 27, down 2.7 percent from Sept 27 and 20.5 percent lower than a year ago.

The International Monetary Fund (IMF) estimates that net inflows into reserves from foreign exchange swaps were in the region of $4.8 billion in 2014 and 2015, which means that the CBN net reserve position is much lower than the gross position, according to Cowan.
Tiffany Odugwe, a research analyst at Cardinal Stone Partners, said the auction is meant to clear a backlog from two weeks ago when the CBN sold $314 million, instead of an agreed $800 million. “The banks ought to have bid on behalf of the manufacturers at the time when $314 million was sold,” Odugwe said. “The CBN is selling $500 million to clear the backlog of demand that was not met then.”
The last time the CBN held a special intervention dollar auction, market participants criticised the process for being opaque, even as they said the dollars sold fell short of demand.
Some manufacturers said they were not afforded ample time to bid in the dollar forwards auction by the CBN holding today, Tuesday November  1.
Frank Jacobs, president of the Manufacturers Association of Nigeria (MAN) said he sent a text to Godwin Emefiele, the CBN governor, to postpone the auction in order to afford him some time to disseminate the information to manufacturers.
“There was not enough awareness of the auction and as such, there may be no sufficient time for manufacturers to bid,” Jacobs said by phone. “I only heard about it yesterday evening and although I tried to call some, I could not have called all 2,500 manufacturers within that time frame and expected them to meet 12:00pm deadline yesterday.”
Bids closed at noon yesterday despite the fact that banks were notified last week and given till noon today to send the list of foreign exchange requests from their customers in the manufacturing sector, sources familiar with the matter say.
But Jacobs observed that the CBN’s series of dollar auction was a good sign that the apex bank was committed to supporting Nigeria’s manufacturing sector, which is in recession.
“Although the auction does not cover all our needs, it shows that the CBN is interested in our success, even though it appears the commercial banks (the primary dealers) are not cooperating with the regulator to soften the hurdles thrown at us by dollar shortages.”
A lack of dollars has caused many firms to halt operations and lay off workers, compounding an economic crisis rooted in fall in the price of oil, which accounts for 70 percent of Nigeria’s budget revenues.
Africa’s biggest economy is facing its first recession in 25 years.
The economic crisis has kept the naira under pressure against the dollar, and the central bank has struggled to support the local currency with diminishing foreign exchange reserves.
There had been no activity on the interbank market, where the naira is quoted at N305 per dollar, two hours after it opened on Mondaydata from the FMDQ show.
On the black market, the naira was quoted at N470.
“The CBN needs to have a long term plan about real naira flexibility going forward,” Cowan said.