Nigeria’s central bank further tightened its currency controls on Tuesday, effectively shutting down the interbank foreign exchange market and cutting the amount of U.S. dollars commercial banks can hold.
The move is the latest effort by the central bank to stabilise the naira <ngn=>, which has fallen more than 20 percent against the dollar in two months as lower energy prices darken the economic outlook for Africa’s top oil producer.
The announcement is another signal that sub-Saharan Africa’s second-biggest economy is rolling back liberal reforms championed by foreign investors as it seeks to insulate itself from the impact of the global downturn.
The regulator said all foreign exchange purchases from its window and other sources were only to be used for customers and not on the interbank market, giving it a tighter grip on the exchange rate by preventing banks from trading dollars among themselves.
It also said the net open foreign exchange position of banks would be reduced to 1.0 percent of shareholders’ funds from Feb. 11. The net open position had been 20 percent until mid-December but has been repeatedly cut since then.
“These moves may be necessary in the short-term, particularly given the inflation risk from currency weakness, but in the long-run investors are attracted by markets where currencies adjust to reflect fundamentals,” said Mike Hugman, emerging markets strategist at Standard Bank.
The central bank circular was addressed to commercial banks and foreign exchange dealers and copied to state oil firm NNPC, oil firms operating in Nigeria and commodities exporters, who account for most of the liquidity in the interbank market.
Analysts said they expected a massive parallel market to emerge, on which the naira was expected to weaken sharply, as the central bank would be unable to meet all dollar demand.
CONFIDENCE KNOCKED
The central bank has been careful to make clear that foreign investors can continue to get funds out of Nigeria as it tightens currency controls but it sends an unnerving signal.
Emerging markets funds have suffered huge redemptions in recent months, particularly as plunging oil prices devastate sentiment towards countries like Nigeria and Russia, and alarm over potential controls have increased the frenzy to get out before the doors are closed.
British fund manager New Star suspended its Heart of Africa fund — roughly a fifth of which was in Nigeria — in December citing difficulties honouring redemptions, and on Monday said it was winding up the fund altogether due to deteriorating market conditions [ID:nL9380632].
Trading on Nigeria’s interbank foreign exchange market came to a standstill minutes after the market opened on Tuesday amid confusion over earlier directives from the central bank.
Traders said they were seeking clarification of a decision by the country’s Monetary Policy Committee (MPC) on Monday which allows the interbank market a margin of only one percent around the dollar buying or selling rate of the central bank.
The central bank said on Monday it was committed to managing the exchange rate within a band of plus or minus three percent.
The regulator said the difference between its buying and selling rates would not be more than one percent, while the rate of banks and bureaux de change should not be more than one and two percent respectively outside the central bank rate.
The naira dipped to 149 to the U.S. dollar in the first 15 minutes of trading on Tuesday, from a close of 147.70 on Monday, before the market shut down to enable dealers to meet and discuss the new directives, traders said.