Nigerian Currency in Monetary Policy Reform Mix

Dr. Sara Alade, deputy governor of the Central Bank of Nigeria. The country is dependent upon oil as its major foreign exchange earner., a photo by Pan-African News Wire File Photos on Flickr.

The Naira in monetary policy reform mix

WEDNESDAY, 09 OCTOBER 2013 00:00 CHIJIOKE NELSON
Nigerian Guardian

Reforms in the financial system were sustained recently with the delisting of 20 Bureaux De Change (BDCs), ban on the importation of foreign currencies, the replacement of Wholesale Dutch Auction System and a directive to pay all inward transfers in Naira. CHIJIOKE NELSON overviews the issues.

LAST week, Nigeria’s apex bank was once again in the public domain, with the decision on emerging issues related to the monetary policy. One was the delisting of Bureaux De Change (BDCs), numbering about 20. The other was the ban placed on the importation of foreign currencies, which the country had become notorious for. The culprits facilitating and engaging in the illicit business were the deposit money banks and BDCs. Another was the directive to pay all inward money transfers in Naira according to the prevailing exchange rates.

The irony of the whole drama was that the importation of the dollars and other intrigues could not be associated with any identifiable projects nor documented, while other parts of the importation were assessed to have fueled speculations on foreign exchange.

Though the apex bank said further importation of foreign currencies would be subject to regulatory approval, the monetary policy was tightened as it also suspended foreign exchange trading through the Wholesale Dutch Auction System (WDAS), replacing it with the Retail Dutch Auction System (RDAS). A source said that the importation of these dollar have added pressure to domestic economic activities as some outfits in the country are now collecting only dollar as a means of payment.

However, at the first session of the Retail Dutch Auction System (RDAS), according to data compiled by the Financial Market Dealers Association (FMDA) on its website, $300 million was offered at the window, while about $187 million was sold. On Monday, the second auction on RDAS window offered $300 million, but only $231.1 million was sold, returning $68.9 million to the coffers.

To stakeholders and others in the knowledge of the current monetary policy change and that in the foreign exchange trading window, the question will be: Why did we not sell all the dollars offered as usual? Does it mean that the new system may have censored the real demand for foreign exchange? Perhaps, sorting out individual buyers and their identities, as opposed to general or group purchase system the deposit money banks were using to mop up all the dollars offered up. Are the usual buyers learning the system or afraid to buy again? In fact, the experience before now is that everything offered at the WDAS are usually sold out and all the participating banks, usually from 15 to 21 successful. Was the demand by their customers for foreign exchange so low at the first auction on RDAS, such that over 35 per cent of the dollars was unsold? Maybe, subsequent ones will shed more light. The Naira was sold at N155.75 at the official window against the dollar; N161.72 per dollar at the interbank exchange; N163 per dollar at BDCs; N163.5 at the parallel market; while a pound was sold at N249.89 and euro, N211.62 officially.

On September 4, a source said that the Naira strengthened the most to pare its five-day drop on speculation that the state-owned oil company of Africa’s biggest crude producer may sell dollars.

But oil producers, including the state-owned Nigerian National Petroleum Corporation (NNPC), are the biggest source of U.S. currency after the Central Bank of Nigeria, which offers foreign exchange at auctions on Mondays and Wednesdays to maintain Naira stability.

According to the International Monetary Fund, importers’ demand for dollars to pay for goods in West Africa’s biggest economy, is estimated to expand by 7.2 per cent this year.

A London-based emerging-markets strategist at Standard Bank Group Limited- Africa’s largest lender, Samir Gadio, said in an e-mail that “the market expected the NNPC to sell dollars shortly. Market players are positioning accordingly.”

The naira advanced 0.7 per cent to 160.30 per dollar by 4:32 p.m. in Lagos, the commercial capital, after weakening as much as 0.8 per cent.

The currency also pared gains by 0.4 per cent in the past five days, the biggest weekly decline in four, and dropped 2.6 per cent this year as at the weekend.

The central bank tightened controls of its auctions last week, replacing a wholesale system with retail sales from October 2.

According to the Chief Executive Officer of Lagos-based Forward Marketing Bureau de Change Limited, Abubakar Mohammed, banks seeking dollars must now show proof that their customers have requested the currency.

On Monday, reports said the CBN is more likely to tighten monetary policy than ease it in the months ahead. “We’re likely to remain where we are but if we’re going to move at all, we’re more likely to tighten than to ease. I would advise against precipitate easing only to turn around after a few months and tighten,” Lamido Sanusi said told journalists on Monday, in Paris.

Sanusi said that inflation is under control and Nigeria’s currency, the Naira, has held up well relative to other emerging market currencies.

However, the Naira has weakened 2.6 per cent against the dollar this year and may come under more pressure as President Goodluck Jonathan estimates a 12 per cent drop in oil and gas revenue in 2014.

Sanusi said last month the bank is committed to use its currency reserves to support the Naira. “Inflation should be down to under eight per cent by December. The exchange rate has remained fairly stable, it’s pushing the band, but it’s not lost anything near what we saw in India, South Africa or Ghana, so we’ve done very well on that score,” Sanusi said.

Already, there are speculations that the system (RDAS) would curtail the arbitrary demand for the dollar, which a source claimed to have added pressure on the local economic activities. Some are concluding that the system has opened up banks’ round-tripping business and speculations on dollar through official window.

At the interbank window, the offered rate seven-day call as at October 4, moved to 11.71 per cent from 10.96 per cent; 30-day call, 11.96 per cent from 11.25 per cent; 60-day call, 12.21 per cent from 11.58 per cent; 90-day call, 12.46 per cent from 11.92 per cent; 180-day call, 12.71 per cent from 12.13 per cent; and 365-day call 12.96 per cent from 12.67 per cent.

Recently, CBN took a definite stance to shore up the value of the Naira against the persistent free fall of the currency in recent times, as it banned the importation of all foreign currency, unless by regulatory approval. The move, which was part of its determination to save the economy from external threats and dominance, was also a strategy to stem the rising tide of Naira-dollar speculations and unpredictable quantity of dollar in circulation. There were indications that the latest move was sequel to the bank’s withdrawal of the operating license of 20 Bureaux de Change (BDCs) found to have purchased and sold huge sums of dollars with no documentation to show details of the transactions.

The Deputy Governor, Economic Policy, CBN, Dr. Sarah Alade, recalled what the proceedings of the last meeting of the Monetary Policy Committee, saying the management of the apex bank frowned at the existence of strong foreign exchange demand pressures from domestic sources, which are not necessarily matched with increase in the importation of goods and services.

Alade explained that apex bank noted with displeasure the surge in dollar cash importation by Deposit Money Banks (DMBs) and the huge cash sale of the U.S. dollars to BDCs by the DMBs, which recently were found in breach of the operational rules. However, while noting that Nigeria currently ranks as the largest importer of United States dollars, Alade disclosed that the purchase and sale of the cash is not adequately documented by the BDCs.

She noted that if the trend was not contained, it could pose grave threats to the value of the Naira as well as the Nigerian economy, which she said had gradually become dollarized, adding that the management team led by Mallam Lamido Sanusi, decided to take immediate action to safeguard the Naira and ensure its stability in the face of the aforementioned challenges.

Meanwhile, a statement from CBN, said RDAS will allow only customers of deposit money banks to buy foreign exchange at the CBN through their banks as against the WDAS where the deposit money banks bought foreign exchange at the CBN on their own accounts and in turn sold to their customers. The re-introduction of the RDAS is expected to prevent round tripping of foreign exchange purchased at the apex bank’s official window to unauthorised channels.

There was also a circular from CBN, mandating all DMBs to redeem all inward money transfers in Naira to the recipients at the prevailing inter-bank foreign exchange rate, saying it is in line with best practice. While condemning the action of erring BDCs, CBN emphasised the continued relevance of the BDCs in the foreign exchange market, even as it stressed that it would continue to support their operations in line with the existing guidelines.

To guard against stifling the activities of the BDCs, the apex bank has authorised all deposit money banks to deal at the official foreign exchange market rate, warning that banks can only sell foreign exchange cash to BDCs subject to a maximum of $250,000 per week per BDC.

The CBN also advised all BDCs to continue to comply with the conditions of their operating licenses, including the proper rendition of returns with respect to the purchases and sales of foreign exchange.