The Central Bank of Nigeria (CBN) will no longer allow oil companies to buy U.S. dollars at its auctions to fund oil product importation because the firms should use the foreign exchange they earn from exporting crude oil, the CBN said in a publicly circulated letter. The decision by the CBN is expected to reduce U.S. dollar demand at its bi-weekly auctions and support the naira, which fell to its weakest ever in the interbank market yesterday. Yesterday, naira weakened to a new record low of 164.85 to the U.S dollar in the interbank market, pressured for a second day by comments made by the central bank that it will not support the local currency at all costs.
The naira fell to 164.85 to the dollar in intra-day trading from 161.70 at the close on Wednesday. The central bank said on Wednesday the naira could be allowed to devalue if oil prices and foreign exchange reserves continue to fall and attempts at monetary intervention are exhausted.
Traders said the failure of the regulator to fill all demand for forex at its bi-weekly auction, its breach of policy in allowing the naira to trade outside a band of +/- 3 percent from around 150 to the dollar, and its comment on the outlook of the currency have eroded confidence in the market.
“Many importers are now bringing forward their obligations in the face of the recent position of the authority on naira valuation,” one dealer said.
“We have seen the forex reserves going down at a time when the oil price was above the 2011 budget benchmark, and the fact that next year’s budget is being premised on (an exchange rate of) 153 (to the dollar) — all these are an indications that government was no longer willing to defend the naira at the present level.”
The 153 assumption in the 2012 is significantly weaker than the 150 per dollar rate on which Nigeria’s 2011 budget is based.
Central bank Governor Lamido Sanusi said on Wednesday there was no change in the foreign exchange stability stance for now but the bank would not support the naira at all costs.
“Certainly if we do continue to see threats to oil price, if we do continue to see threats to the reserve position and if we think we have exhausted the limits of monetary intervention, we will have to do that, and we will have to announce. But if there’s going to be a depreciation, its something we want to be in control of, and we want to be the ones that will announce it,” Sanusi said on CNBC Africa television.
The central bank sold $400 million at 155.40 to the dollar at its bi-weekly auction on Wednesday, short of the $685.37 million demand.
The IMF said earlier this year that the naira was over-valued and that a more flexible approach to currency control would cushion external shocks to sub-Saharan Africa’s second-largest economy.
“Sanusi’s latest views somewhat represent a break with previous comments surrounding the naira and point to the increased possibility that the Central Bank of Nigeria is effectively starting to consider a controlled currency devaluation,” Samir Gadio, analyst at Standard Bank, said in a research note.