CBN restricts dollar sales as Naira sinks deeper

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The Central Bank of Nigeria (CBN) on Thursday banned the sale of dollars at its Retail Dutch Auction System (RDAS) to importers of telecoms equipment, power generators and finished products.

Others affected by the ban include importers of electronics, finished products, invisible transactions business and information technology.

However, they can source their foreign exchange requirements from the interbank market and dealers.

The CBN ‘s action stems from the downward slide in the price of crude oil and it’s subsequent effect of the country’s foreign reserves.

Owing to the directive, the naira hit a new intra-day low in almost five years to N170.05 against the dollar yesterday, falling 1.87 per cent as the stock market continued to slide, Reuters reported.

In a circular titled, Exclusion of Some Transactions from the RDAS Window, posted on its website yesterday, the CBN said: “This is to inform all authorised dealers and the general public that in order to maintain the existing stability in the foreign exchange market and to further strengthen the various measures already initiated by the Central Bank of Nigeria, the importation of the following items shall henceforth be funded from the interbank foreign exchange market only: electronics, finished products, information technology, generators, telecommunications equipment, invisible transactions.”

In another circular, the central bank also said it had observed that banks and discount houses now have a preference for keeping their idle balances in its Standing Deposit Facility (SDF), thereby constraining the process of financial intermediation.

In order to encourage banks to increase lending to the productive sector of the economy, the regulator therefore announced a review on the guidelines for the operations of the SDF.

Specifically, it stated that “the remunerable daily placements by banks and discount houses at the SDF shall not exceed N7.5 billion. This shall be remunerated at the SDF rate of 10 per cent per annum.

“Any deposit by a bank and discount house in excess of N7.5 billion shall not be remunerated. These provisions are without prejudice to the subsisting Monetary Policy Rate (MPR) corridor.

“For the avoidance of doubt, the SDF remains as a monetary policy tool.”

According to the banking sector regulator, the MPR corridor remains +/- 200 basis points, that is 10 per cent per annum up to the limit of N7.5 billion.

Reacting to the CBN’s directive on the diversion of demand from CBN’s official foreign exchange window to the interbank market, a market analyst, who preferred not to be named, said: “The objective of this policy decision is to reduce pressure on foreign exchange reserves.

“In October, the CBN used 10 per cent of its foreign exchange reserves to intervene in the foreign exchange market. The last time the CBN used such a large share of foreign exchange reserves, in a month, to intervene was in the second half of 2011 and the central bank devalued the NGN by 5 per cent in November 2011.”

He said the policy decision confirmed that the CBN could not afford to keep intervening in the foreign exchange market to defend the official target exchange rate of NGN150 +/-3%, at the rate it has been doing in recent weeks, especially in a depressed oil price environment.

“In enacting this policy, the CBN must have expected the interbank exchange rate to weaken. Which makes me wonder if this policy decision is a tacit devaluation” he said.

On the second directive by the central bank, which capped banks’ deposits that earn interest, he termed the move negative for the naira.

“I think this is negative for the naira, because it will result in banks diverting funds to treasury bills, which will put further downward pressure on yields and make them less attractive to foreign investors.”

The market analyst said the fact that both policy decisions were naira-negative, was evident from the depreciation of the naira to its weakest level, NGN171.82/$1, where after it retraced to about NGN170/$1.

“I believe the central bank must have anticipated further naira weakness, and widening in the gap between the official and interbank exchange.

“It is for this reason, I believe this may possibly be a tacit devaluation, or at least a precursor to an explicit one that may be announced at the November 25 MPC meeting,” he explained.

He added that the implication of the policies adopted by the CBN was that the rate of inflation would rise and could have adverse consequences on consumer stocks.

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