New forex rate reflects market liquidity, says CBN

A Naira exchange rate of N196.95 to the dollar set this week by the Central Bank of Nigeria (CBN) reflects the level of dollar supply in interbank market, the apex bank stated yesterday.

Reuters quoted CBN spokesman, Ibrahim Muazu, as saying: “We are not fixing rates. The present rate is a reflection of the level of dollar supply in the market.” One other economist said the move would hurt the country’s precarious forex reserves position, however.

The regulator had previously set the rate at N197/$ in February after the currency’s value was eroded by the fall in oil prices. Dealers told Reuters the CBN had been selling dollars to the interbank market at the adjusted rate. They, however, noted that the change was too small to be considered a revaluation for the naira, particularly in the face of dwindling foreign reserves.

The naira was trading at N198.95 to the dollar on the interbank market and between N215 to N218 in the parallel market. Reuters quoted head of research at Ecobank, Angus Downie, as saying: “By lowering the central bank rate offered to banks albeit very moderately, the central bank is adding to pressures on FX reserves … equivalent to around 4.9 months of imports.” Nigeria’s foreign reserves fell to $29.4 billion by June 2, down 20.1 per cent from a year ago as the central bank burns cash to defend the local currency.

The bank merged its biweekly currency auctions market with the interbank market last February and fixed the exchange rate, a move that amounted to a de facto devaluation of the currency of Africa’s biggest economy. The regulator had also banned commercial lenders from re-selling central bank dollars among themselves, which was an attempt to curb speculation on the naira.

The naira Non-Deliverable Forwards – currency derivatives traded offshore – pointed to the local currency being priced at N221-N225 to the greenback in six month’s time.

“Small changes in the rate could possibly allow the central bank to gauge the changes in demand and supply dynamics, which would inform decisions on when and how best to start lifting forex restrictions,” Cobus de Hart of South Africa’s NKC Independent Economists said.