The Central Bank of Nigeria (CBN) may have left the national currency, the Naira, in the cold with its recent decision to close the retail Dutch Auction System (rDAS). The apex bank had in a circular issued Wednesday February 18, announced the closure of the rDAS foreign exchange window because it has observed a widening margin between the rates in the interbank and the rDAS window, which is engendering undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents. According to it, this development has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public.
Consequently, it stated that all demand for foreign exchange should henceforth be channelled through the interbank foreign exchange market. It however emphasized that it would continue to intervene in the interbank foreign exchange market in order to meet legitimate foreign exchange demands.
Shortly after the apex bank decision was made public, the exchange rate of the Naira headed towards the N200/$ mark in the interbank forex market. This rate is close to the parallel market rate of about N210/$. With this, one of the objectives of shutting down the rDAS, which is to close the gap between the official and parallel market rates, may have been achieved.
Commenting on the CBN decision, Proshare Nigeria said “this decision clearly underscores our position earlier communicated in our report titled “Postponement of reprieve for the markets” that the CBN will not be able to effectively hold unto its resolve to continue to defend the local currency given the realities in the international crude oil market and consequently the fast depletion of the nation’s stock of foreign reserves”.
It added that “we view the decision of the apex bank to scrap the rDAS foreign exchange window as a technical way of re-pricing the value of the Naira (a euphemism for devaluation), and this is expected to check the avoidable hemorrhaging of the nation’s stock of external reserves”.
It further said: “We reckon that the re-pricing of the domestic currency is a necessary policy move for the restoration of stability in the financial markets. Also, at the macro level, we believe that it presents an effective way of addressing the double jeopardy of low government earnings (on the fiscal side) and high interest rate (on the monetary side)”, “arguing that the re-pricing will engender stability of both fiscal and monetary policies because it implies higher government earnings from crude oil in Naira terms and will also give the apex bank the needed room for reducing the monetary policy rate”.
The external reserves has declined by 5.24 per cent as at February 16, 2015 to US$33.66bn from US$34.47bn held as at December 31, 2014. But now that the CBN has allowed the Naira to find its level in the interbank forex market, the apex bank may not have much need to draw from the reserves to defend the national currency. However, the implication is that if the country’s forex earnings does not improve significantly, Naira to Dollar exchange rate may go up to N250/$ or even higher.
Ray Echebiri is BRANDPOWER’s Chief Editorial Consultant: [email protected]
