Central Bank of Nigeria tightens rules to support naira

Nigeria’s central bank announced new rules on Friday requiring currency dealers to put naira in their accounts at the bank two days before bidding in its forex auctions. Such a move, dealers say, was unlikely to stop the local currency from weakening.

Nigeria has been selling dollars directly to lenders to prop up the naira, which has lost 2.9 percent this year as the US Federal Reserve begins reducing its stimulus, which has led offshore investors pulling money out of local bonds. The naira was trading at 163.38 to the U.S. dollar at 12:32 GMT, weaker than the five-month low of 163.35 it touched on Wednesday.

“I don’t think this will stop the naira from weakening. People who have naira and have need for dollars will still buy it,” one dealer told Reuters, referring to importers in the West African country. Currently, Nigeria is heavily dependent on imports which accounts for 80 percent of goods sold in the country.

Its currency has hovered around 162.50-163.60 naira in the past two weeks with a surge in dollar demand from offshore investors exiting local bonds and bureau de change agents buying hard currency on behalf of their customers. This new measure, which comes into effect from February 10, is expected to prevent forex speculation at its naira auctions.

The regulator sells on average $800 million at its twice-weekly forex auctions on Monday and Wednesday. Dealers said the measure means customers bidding for dollars at the central bank would have to put the funds into their account two days before submitting their bids.

Prior to now, they could bid and fund their accounts on the same day. One dealer stated, “I doubt if this move will have any impact on the interbank … apart from the opportunity cost for banks for leaving cash with the central bank for two days.” The dealer was quick to note that the move was aimed at soaking up liquidity.

On Wednesday, the central bank withdrew 750 billion naira from the banking system to enforce a new higher cash reserve requirement for lenders to hold government deposits, which accounts for around 10 percent of total banking deposits.

However, the Central Bank of Nigeria data, this week, showed that Nigeria’s foreign reserves fell to $42.69 billion as of February 4 compared with $46.09 billion a year earlier. Reserves fell 1.40 percent in the month to that date, the data showed.

Source: The Africa Report