Nigeria Central Bank sells dollar to banks at N198 in bid to carry out Second Devaluation within Three Months

                                                               Central Bank of Nigeria

        The Central Bank of Nigeria on Wednesday announced the closure of the Retail and Wholesale Dutch Auction Systems of the foreign exchange market, in a bid to reduce pressure on the Naira.

In a statement issued by the Director, Corporate Communications Department, Mr. Ibrahim Mu’azu, the central bank was said to have fixed the exchange rate of the Naira to the dollar at 198, which is N30 above the previous devaluation of N168 three months ago.

 After the postponement of the Nation's General Elections, the Naira hit an all-time low of 202 against the dollar at the interbank market last week, and this led to a speculation of a second devaluation of the currency. Ecobank, a pan-African banking conglomerate, released a new report titled: 'Nigeria: Devaluation pressures grow.'

 The report which stated that, "The CBN asked banks to submit the amount of the US dollar demand they required based on a selling price of N198, with bids assessed on the banks’ actual levels of client demand."

 "With the CBN selling N30 above its N168 (+/-5 per cent) rate, this could be seen by some in the market as a de facto devaluation. However, the N168 reference rate remains unchanged and the move appears to be an attempt to inject the US dollar liquidity to calm the foreign exchange market.” 

The Ecobank’s Economics Research Desk, headed by Mr. Angus Downie which released the report further said that the previous N168 devaluation was unsustainable.It read, "With the CBN selling N30 above its N168 (+/-5 per cent) rate, this could be seen by some in the market as a de facto devaluation. However, the N168 reference rate remains unchanged and the move appears to be an attempt to inject the US dollar liquidity to calm the foreign exchange market."

"Moreover, the official N168 rate does not provide an accurate measure of where the market clears. This leads us to think that the CBN is managing expectations of another devaluation."

"Nonetheless, the pressure on the exchange rate means that something has to give and devaluation provides some temporary relief. However, unless oil prices rise strongly to provide a large increase in foreign exchange reserves, ultimately, a flexible exchange rate regime helps the economy to adjust to external shocks and allows the CBN to conduct monetary policy according to the needs of the economy (without having to take into consideration how exchange rate policy affects domestic demand).

“Until such a change is made, and assuming oil prices remain low, further exchange rate pressures will likely push up bond yields as investors close out longer positions and remain cautious to short-term exposure. Despite some opportunities to buy, the US dollar liquidity shortages will maintain foreign investor caution, adding to the upwards push on yields.”

 Nigeria reserve closed at $34.28bn on December 31, 2014 but had been fallen to $32.66bn as of February 16, 2015. The Naira has slumped 19 percent in the past six months as a result of the falling oil prices. Crude Oil accounts for 90 percent of Nigeria’s export earnings and 70 percent of government revenue.

Besides oil, Nigeria has a lot of Natural resources, not limited to tin, iron ore, coal, limestone, niobium, lead and zinc. It will be a good idea to engage in other methods and procedures in order to diversify the country's economy, but due to corruption in the government, the country has all focus on revenue coming from oil.

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