CBN moves to stabilise naira exchange rate on banks’ holdings in dollars

The resolve of the Central Bank of Nigeria (CBN) to use banks’ foreign exchange holdings for trading- Net Open Position, (NOP)- for stabilising the naira, may run into hitches.

This is  unless  there is a review of categories of items eligible for official foreign exchange market Retail Dutch Auction System, (RDAS) auctions and strict supervision of banks, BusinessDay investigations have shown.

Banks’ net open position, which is currently at 0.5 percent of shareholders’ funds, unimpaired by losses has been subjected to series of reviews from five to zero percent, then to 0.1 at the last Monetary Policy Committee meeting. It was thereafter raised to 0.5 percent with the utilisation of funds timeline changed to 72 hours, after which it should be returned to CBN at the prevailing rate.

BusinessDay gathered that with the postponement of the elections by six weeks, the economy will be witnessing much political spending. With monetary options available to the CBN thining out, the apex bank is said to have resolved to use the NOP as a tool for acheiving a stable exchange rate.

Read also: Statoil cuts investments due to oil price dip

Dollar demand may be “temporarily high” following extention of the electios by six weeks and should ebb afterwards, says, Friday Ameh, energy analyst.

The decision of  the CBN was also informed by the widening gap of between N40/N42 existing between the official and parallel markt, which is creating arbitrage and roundtripping opportunities for banks.

A source close to the CBN told BusinessDay last night, that the regulatory bank is considering an upward review of the NOP to 1 percent from the present 0.5 percent.

It was also gathered that the CBN has since discovered that the major culprits of forex market infractions are the banks and not necessarily the Bureau De Change (BDCs), hence the apex bank is putting measures in place to monitor the banks.

Afrinvest Analysts in their outlook for 2015 said, “Whilst we expect CRR and MPR to remain at current levels, we see Net Open Position (NOP) becoming a pivotal monetary policy tool that may be tweaked from time to time, to achieve desired results at the FX segment.

“Our foreign exchange rate outlook is tied to oil price scenarios in 2015. A further significant price slide below US$40pb may necessitate a further currency devaluation by the CBN; otherwise, demand-supply dynamics will keep the naira at approximately N200/US$1 at the interbank.”

Ayodeji Ebo, Head Investment Research, Afrinvest Securities said, “We agree the CBN will continue to employ NOP in managing the activities in the forex market. However, the efforts still remain an uphill task, due to its ineffectiveness in the past months.

“In our view, the policy, excluding some items from participating at the CBN official market has continued to spur demand at the interbank market. This led to a significant spread from N9.92 in October to the current above N20.00.

“The proportion of informal activities in the forex market remains huge (estimated at over 50.0%), hence the pressure is expected to persist, coupled with demand from capital flow reversals.”

Razia Khan, managing director/head Africa macro global research, Standard Chatererd Bank, London said, “The election delay puts at risk our call for further policy tightening at the March MPC meeting. With oil prices still languishing at low levels, resulting in minimal injections into the FX reserves, we expect the reserves to come under further pressure, perhaps dropping to about six months of import cover.

“A further tightening of administrative controls is plausible, with fewer categories of demand eligible for RDAS auctions.

“We expect spreads between Nigeria’s parallel and interbank FX rates to remain pressured, although an agreement by Nigeria’s Financial Markets Dealers’ Association limiting daily NGN depreciation in the interbank market to 2% will likely slow the pace of weakening despite the weaker parallel market NGN rate (which mainly reflects smaller -scale, informal -economy and bureau de change transactions).”

Bismarck Rewane, foremost exonomist said, “Recent policy measures have heightened pressure on the naira, leading to a record low of N210/$ at the parallel market, with naira losing 17.9% (y-o-y) at interbank market. It remained flat at N168/$ post November devaluation and the CBN’s ability to defend the naira is limited.”

John Omachonu