Naira’s rapid fall prompts CBN intervention

The Central Bank of Nigeria is intervening to prevent the naira from falling more rapidly a month after the government eased controls for the currency to trade more freely, Bloomberg has reported.

The naira has fallen over 40% since the central bank in June removed restrictions in a bid to unify the exchange rates and boost foreign investment. In the last two weeks, it has traded between 750 and 790 per dollar at the official Investors and Exporters (I&E) window.

On Wednesday, the currency closed at 782.42, according to FMDQ where it is traded. But with bids falling below 800 (on Tuesday it reached 803), the central bank stepped in with dollar sales, Bloomberg reported, quoting Rand Merchant Bank.

Why this matters

Goldman Sachs Group Inc. said last month that the longer-term outlook for Nigeria to lure back foreign investment depends on a complete elimination of currency controls.

– Limited supply

Traders said the challenge has remained the limited supply of dollars in the market as demand remains high. That has quickened the naira’s devaluation and revived the black market that almost collapsed weeks ago.

The naira traded at 800 per dollar at the parallel market Tuesday and Wednesday, reopening a gap with the official rate that had closed after the devaluation.

“The market expects the Central Bank of Nigeria to intervene more than once this week given the size of intervention yesterday and the current demand across the market,” Rand Merchant Bank analysts wrote in a note.

After its initial reform, the CBN said in June that the current float of the currency remained “managed” and not “totally free”. Deputy governor Kingsley Obiora said, “There is no country in the world, even the US, that has a completely free float.”

– Modest intervention

Bloomberg quoted other traders as saying that the dollar sales by the CBN so far have, however, been too modest to say that the exchange rate control has returned.

“The central bank has been intervening into the market over the last two weeks or so to support liquidity but this has not been very consistent,” it quoted Ayodeji Dawodu, director at UK-based BancTrust & Co. Investment Bank in London as saying.

“Trades are reportedly being conducted between 700 naira to 800 naira a dollar, which doesn’t seem to indicate controls.”

Traders and analysts now expect further clarity on CBN’s monetary policy. Deutsche Bank analysts said this week the naira may not deviate much from current levels pending such clarity.