CBN measure to save Naira unconventional, analysts say

By: Okoro Chinedu  
2015-02-17 08:59
Lagos - Analysts are not reading much into moves by the Central Bank of Nigeria moves to sell foreign currency outside the Retail Dutch Auction and interbank structures of the foreign exchange market.
The measure continued on Monday.

In a somewhat unconventional move, the monetary authority asked commercial lenders to submit their US dollar demands based on a selling price of USD/NGN198 to the apex bank. As was the case on Friday, bids were assessed based on underlying commitments and successful orders filled at the CBN's pre-determined rate.

"This should not be construed as a de facto devaluation as the CBN's reference rate remains unchanged at USD/NGN168. Instead, it is an attempt to bring calm to a panic-stricken foreign exchange market. By settling transactions at rates which are more aligned to those of the interbank market, the CBN is seeking to manage liquidity more prudently to ensure that real demand is being met. Restricting the interbank trade of US dollars acquired at the Retail Dutch Auction serves to reinforce the CBN's objective of rooting out speculative activity," said an analyst.

He argued the mechanism was merely a stop gap measure to stabilise a frenzied market and that sustained intermediation will continue to erode the CBN's international reserve holdings, last recorded at US$33,04 billion.

"However, it could provide the means with which to anchor the naira and rein in NDF pricing, at least in the short term. What remains clear is that the official rate does not provide an accurate reflection of market dynamics or prevailing liquidity conditions. There is talk that perhaps the market is being primed for a devaluation, which would certainly narrow the gap between the official, interbank and bureau de change rates."

Rand Merchant Bank pointed out that the central bank had, however, dampened speculation of a deliberate naira adjustment and continues to dismiss the possibility of a free float, stressing Nigeria's grave import dependency and the undesirable impact of a substantially weaker currency on the real economy.

"But, as we argued in our flash note titled 'There she goes', a flexible exchange rate would cushion Nigeria against exogenous shocks, providing authorities full discretion in the conduct of monetary policy," the firm stated on Tuesday.
The thinktank said the naira's weakness, exacerbated by the sudden decline in the oil price and election related uncertainties, has brought to light long-standing structural imbalances in the Nigerian economy. The naira will serve as the adjusting factor in the rebalancing of the domestic economy.

"Sustained upward pressure on the currency pair could entrench bearish sentiments in the local bond market. Yields are at multi-year highs as investors shy away from long-term exposure and look to exit maturing short-dated positions.

Current levels might prompt short spells of opportunistic buying, though investors are likely to be guided by prevailing levels of liquidity, the extent of domestic demand and policymakers' appetite for higher rates," RMB stated.

- CAJ News