There appears to be no reprieve for the Nigerian currency, the naira, as it continued its free fall yesterday, losing N3.80 to close at N150 against the United States dollar at the Central Bank of Nigeria Foreign Exchange Intervention Window.
Following the depreciation of the naira by more than 5 per cent yesterday, the foreign exchange dealers shut down the interbank foreign market.
This development that has continued to drive up the price of imported products, THISDAY gathered, would be one of the major issues to be discussed at the Bankers’ Committee meeting billed for this morning at the Civic Centre in Lagos.
The Bankers’ Committee is an association of the chief executives of banks and selected financial institutions, which meets bi-monthly to discuss the state of affairs in the industry. The Governor of the Central Bank of Nigeria (CBN), Prof. Chukwuma Soludo, usually chairs the meeting
The naira, which had recorded relative stability at N118:$1 over the last three years until late November, has lost N32 at the official market, Wholesale Dutch Auction System (WDAS), and about N34 at the inter-bank market, to close at N146.20:$1 last Friday.
The naira has slumped more than 23 percent since Nov. 26, when the central bank began limiting the supply of dollars to defend its foreign-currency reserves following a drop in the price of oil, which accounts for 90 percent of Nigeria’s export revenue.
The depreciation of the naira at the inter-bank market yesterday, according to market operators, was triggered by the fact that the banking watchdog, as usual, failed to meet the foreign exchange demand.
Besides, the inter-bank foreign exchange market, where the CBN has since last month begun its intervention through the two-way quote, has been the only major source of forex for banks – since the apex bank has deliberately refused to commence trading at the official market, which it moderated, for over three weeks when the market closed for the Christmas and New Year holidays.
Given this scenario, coupled with the volatility in the inter-bank market, some banks have started intimating their customers to expect further depreciation in the market.
A copy of one of such letters obtained by THISDAY entitled “FX MORNING UPDATE – JANUARY 12 2009”, read in part: “Good morning all, On Friday (last Friday), the CBN continued its intervention by selling a total of USD160 million at a marginal rate of $/N144.
“The sale was pro-rated (rationed) amongst the banks that quoted higher than the day’s marginal rate.
“This morning (yesterday morning), the inter-bank market opened at 146.05/15 and very rapidly shot up to 153.20/30 before easing to 152.70/80 as at the time of this report. Trading has been very volatile due to the lack of liquidity in the inter-bank market.
“We expect rates to remain at current levels or higher, unless the CBN consistently meets the market demand for several consecutive days.
“We will keep you updated as the market progresses.”
The CBN, which supplies the bulk of the foreign exchange needed in the market, has cut back on its dollar sales in an apparent bid to check the activities of currency speculators and safeguard Nigeria’s foreign reserves.
The regulator sold only $160 million at N144 to the dollar to retail banks last Friday compared to $211 million at 141.02 a dollar last Thursday, but this was considered far below demand.
Also, yesterday, the banking watchdog failed to meet the demand for forex – a development that has since been causing uncertainty in the market and driving up the rate. Out of about $700 million demands, the apex bank sold only $150 at the exchange rate of $150:$1.
Given this development, many customers are now desperate to buy dollars at whatever rate available so as to meet up with their transaction obligations.
Citing the volatility of the inter-bank market, authorised foreign exchange dealers of banks, who spoke with THISDAY, yesterday said the market was shut down after two hours trading.
“The inter-bank market shut down after two hours of trade and closed around 11am instead of the 4pm normal closing time because it was volatile. Dealers unanimously agreed that anytime there is more than 5 per cent depreciation of the naira, the inter-bank market should be shut down and that was exactly what we did yesterday,” the Head of Treasury of one of the big banks told THISDAY yesterday.
Market operators insist that in the absence of clarity from the CBN in regards to its foreign exchange policy and limited ability (and willingness) of the central bank to meet demand for dollars, as well as negative market sentiment, the depreciation of the naira is likely to persist in the coming weeks.
The banking watchdog had lost $6 billion between December last year and January this year while trying to defend the value of the naira. Defending the currency at such a pace, according to experts, “will simply not be sustainable” as Nigeria’s foreign reserves stood at $52billion as at January 6, 2009. At this level, the reserves include the $20billion of Excess Crude Account proceeds.
“Fair value is close to N140:$1, so the currency has overshot beyond fundamentals. This is why the CBN needs to step in by indicating what his foreign exchange policy will be in coming months. There are, however, indications that the central bank is attempting to determine the actual level of non-speculative demand for foreign exchange,” Head of the Research Department of one of the investment banks in the country said yesterday.
Over the past six months, the apex bank had become the largest supplier of foreign exchange in the domestic market, controlling almost 90 per cent of total supply as against 10 per cent in the first quarter of the year.
Other supply sources especially foreign direct and portfolio investments: home remittances (Western Union etc) have since dried up as a result of the global liquidity and credit crises.
Besides, further oil price weakness and the release of the 2009 preliminary budget last November coupled with the targeting of a deficit of N1.1trillion ($9.4 billion) for this year, up from N560 billion ($4.8 billion) in 2008, may also have led to further weakness of the naira.
In a bid to douse the pent-up foreign exchange demands, the CBN has since been intervening on a daily basis in the foreign exchange market through the two-way quote, where a dealer gives a foreign exchange quote in which he indicates the price he is willing to buy and sell. This has, however, failed to instil stability in the market.
THISDAY had reported yesterday that in a bid to guard against round tripping at the foreign exchange market, the CBN has further tightened the noose on banks by scrutinising their demands at Inter-bank market.
A CBN official had confirmed that the banking watchdog took the measure to establish the true level of domestic demand for hard currency and flush out speculators from the market.
“Banks are now required to provide more details on their customers to enable us track where the forex purchased from our window is going,” an official of the central bank said.
But in spite of a number of measures which the apex bank has adopted, the naira has continued to nose-dive against the dollar.
Jan132009