The Central Bank of Nigeria (CBN) intervened to defend the beleaguered naira yesterday by selling dollars below its official band for the second time, a sign the bank could weaken the currency to save its dwindling foreign reserves.
The naira fell below N200 to the dollar last week in a rout triggered by weak oil prices and escalating tension over the postponement of a presidential election in Africa’s biggest economy, prompting the central bank to step up intervention.
The bank sold dollars in a special auction on Monday at N198 to the dollar, similar levels to last Friday’s sale, and once again banned banks from reselling dollars bought at the currency auction to other banks, Reuters revealed.
“The special forex auctions are not sustainable in the current setting … until and unless oil prices rise significantly, there is little the authorities can do to prevent the naira from weakening,” Head of Research at Ecobank, Angus Downie said.
Both the Monday and Friday trades by the bank were outside a target band of N160-N176 to the dollar it set in November when the regulator devalued the currency by eight per cent to save its foreign reserves.
The devaluation failed to ease pressure on the naira in an economy reliant on oil for more than 90 percent of its dollar inflows.
The central bank has reiterated it would not devalue the currency but would stabilise the naira and has burned through $1.1 billion over the past nine days to prop up the currency.
Spokesman of the central bank, Ibrahim Muazu had told Reuters on Friday the central bank was not planning to devalue the naira again and would continue its special intervention.
Before Monday’s intervention, data showed foreign reserves at $33.04 billion, down 4 percent from a month ago. The naira Non-Deliverable Forwards – currency derivatives traded offshore – pointed to the local currency being priced at 268-275 to the greenback in a year’s time.
Despite central bank’s intervention, interbank liquidity has remained thin, undermining Nigeria’s credibility as a smoothly functioning capital market, which could trigger its ejection from a JP Morgan emerging market bond index.
“These restrictions may only be lifted once the foreign exchange demand and supply dynamics reaches a point where the CBN is able to supply the market with sufficient foreign exchange,” said NKC Independent Economists in South Africa, Cobus de Hart stated, referring to the ban on dollar re-sales. “This could require a substantial official devaluation.” Agency report
