CBN ACTION: It’s US$1 To N198 In ‘De Facto Devaluation’

CBN Governor, Emefiele holds up a N100 currency note (Photo: TheCable)

The decision by the Central Bank of Nigeria (CBN) to close down its official market and channel all official forex demand to the interbank market has been described as a de facto devaluation of the naira.

According to Reuters, following the scrapping of the bi-weekly currency auction market, the naira will now N198 to a dollar, unveiling a de facto devaluation of the currency of Africa’s biggest economy and top oil producer.

FMDQ, a group comprising Nigeria’s main commercial banks and the central bank, said commercial banks had also been banned from re-selling central bank dollars to other banks, another attempt to end speculation in the naira.

Also, commenting on the decision to close the RDAS, Razia Khan, an analyst at Standard Chartered Bank, who is based in London, stated in a report titled: “Nigeria stops RDAS FX sales,” obtained by TheCable, stated that “this is an effective devaluation of the official Nigerian naira exchange rate.”

“With Nigeria forex reserves under pressure as a result of weaker oil prices, markets had anticipated eventual unification of Nigeria’s different exchange rates. Following the announcement in February that presidential and parliamentary elections would be postponed to 28 March, Nigerian markets were subject to greater volatility.

“Naira losses were frequently large enough to trigger a daily shutdown of Nigeria’s FX market. In response to these pressures, the CBN intervened directly through special auctions, filling demand for FX directly, but at a much higher dollar-naira exchange rate than that prevailing at  the bi-weekly official RDAS.

“With FX reserves under pressure, and amid growing concern that a wide RDAS-interbank spread would encourage ‘round-tripping’, the CBN will now stop RDAS auctions, effectively discontinuing its FX subsidy for certain categories of demand. This is positive news, and should help create more transparency in the Nigerian market.  However, with oil prices currently at levels where FX reserves will be difficult to replenish, the CBN’s appetite for continued support of the interbank FX rate will be closely monitored,” she explained.