The Central Bank of Nigeria (CBN) on Monday executed over $4 billion in foreign exchange transactions as the new exchange rate regime begins, trading at between N253 and N281.5 to the dollar.
The transactions, which were made up of $3.5 billion in forward sales and about $530 million at the interbank market, were targeted at clearing up the huge backlog of demands that have remained unmet.
Forwards market, which forms part of the new policy regime, is a trading window where people can buy forex at present price for future use.The development, by extension, has aided CBN to sterilise no less than N1 trillion in one fell swoop, paving the way to curb liquidity-induced speculation, as buyers back up their purchase by immediate naira value.
The Acting Director Corporate Communications of the Bank, Isaac Okorafor, said Nigeria’s new foreign exchange market made a robust take-off Monday, clearing all the backlog of $4 billion pent-up demand for foreign exchange with the Naira exchanging at N280 to the dollar.
He said that CBN was happy that its objectives to clear the forex demand backlog, perform its role as strictly a market intervention participant and re-launch a functioning and efficient inter-bank market, were being met.
“CBN, in line with its desire to promote a transparent, liquid and efficient market, and in order to engender market confidence and ensure credible price formation, intervened in the market through a special Secondary Market Intervention Sales, addressing the issue of the forex demand backlog by clearing $4.02 billion through spot and forward sales.
“This served in no small way to stimulate price discovery, with the determination of a marginal rate of ₦280/$ through the Special SMIS process.“So, we can state to you categorically, that the FX demand backlog has now been cleared and behind us for good,” he added.
The Central Bank of Nigeria (CBN) injected $532 million into the market under its special intervention at N280/$ after a low trade profile of less than $2 million at between N253 to N260 and later sold another $86.5 million at N281.5, according to a top source in the market.
Meanwhile, capital market operators have expressed optimism that the new framework would enable the currency volatility risk to subside, thereby encouraging foreign investors to leverage opportunities in Naira denominated instruments.
Managing Director of GTI Securities Limited, Amos Aledare explained that the floating of the Naira will see the official rate gravitate more towards the parallel market rate before finding its bearing, since the rate will now be determined by market forces (demand and supply).
With this, he noted that it would help to eliminate the incentive to hoard the dollar, which will subsequently increase the dollar supply even from Nigerians.
The President, Independent Shareholders Association of Nigeria, Sir Sunny Nwosu explained that the new regime would impact positively on the Nigerian capital market if foreign exchange is made available in the system.
He, however, explained that appointing intermediaries for the foreign exchange market would increase cost, adding that the dealers would want to recover the expenses incurred for the services.
At the opening of the session, most of the demands were not backed up by naira provision. This pointed to the fact that the liquidity-tightening stance of the monetary authority ahead of the policy’s take-off was active and that some demands are pent-up.
The trading period scheduled to end by 2.00 p.m. was extended to 4.00 p.m. to allow the CBN auction its dollar stock in efforts to reduce verifiable backlogs, increase liquidity and sustain assessed price stability.
Specifically, the local currency lost about 42 per cent at N281.5 per dollar, when compared with the price-peg at N197, which hallmarked the forex market operations for the last 16 months.
At the parallel market, the Naira strengthened, beating last Friday’s rate of N355 per dollar and settling at the range of N310 to N333.
Although the earlier trading was moving in the range of N328-345 to the dollar, the news of the extension of the trading period to 4.00 p.m. for CBN’s auction crashed the parallel market rates further.
A Bloomberg report stated that the demand for foreign currency built up to about $3 billion since capital controls were imposed 15 months ago to defend the currency’s peg, a figure different from the $4 billion, $5 billion, and $9 billion bandied around.
“We never imagined a free-floating naira. This will release a pressure valve for the economy. We see the economy beginning to thaw and green shoots emerge possibly as soon as a year from now. Before then, we believe the macro-picture will deteriorate,” Yvonne Mhango, a Johannesburg-based analyst at Renaissance Capital Limited, said.
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