Nigeria’s Central Bank will keep dollar sales steady until it crushes currency speculators and there is a convergence of the official and parallel market rates, according to a senior source at the apex bank.
“Much of the dollar demand had been a bubble created by speculators and hoarders of the greenback, but the Central Bank is prepared to keep supply steady till the market rids itself of speculative activities and there is true price discovery,” an unnamed senior source told BusinessDay.
“After the dust settles, then we will decide the next line of action to take in ensuring the official market rate is competitive,” the source said. “The bank targets an exchange rate of N350 per US dollar at the black market.”
The source declined to give any specific timeline as to when another action is likely to happen, although analysts say it may be when the sharp appreciation in the naira starts to cool, or when the black market naira hits N400/$.
The naira gained less than one percent to N314 per US dollar as at 2:00pm at the interbank market Monday, while it extended a four-day winning streak by gaining 1.8 percent to N455/$ at the black market, traders said.
The local currency has shown no signs of letting up, since the CBN upped dollar sales to meet pent-up dollar demand last week.
It sold around $600 million in 60-day wholesale forward contracts, after selling $1 million to each commercial bank to settle dollar demand for school fees, medicals and Personal Travel Allowance (PTA), a routine it promises to sustain on a weekly basis.
Another $100 million in forward contracts was released into the market on Monday, according to its spokesperson, Isaac Okarafor, who says the bank will do “everything possible” to ensure the steady supply of forex to the market.
Improved dollar supply has led to a naira rally, bringing the spread between the official and parallel market rate to N141/$, from over N200/$ last Monday.
With the spread narrowing, dollars would be routed through official channels rather than the black market, according to Ayodeji Ebo, the acting managing director at Afrinvest Securities Ltd.
“Providing dollars for bank invisibles (PTA, medicals, and school fees) has taken 20 percent off total demand in the black market and if the CBN can sustain its weekly auctions, the naira will continue appreciating, which will then instil confidence in the market,” Ebo said.
“Investors will however have to test the market to be very sure dollar liquidity is improving and their funds will not be trapped, owing to dollar shortages as in the past.”
A convergence of both rates will also help tame ballooning inflation- which touched an 11-year high of 18.7 percent in January, driven by high dollar costs.
At this rate, there is likely to be a convergence between the black market and Bureau De Change (BDC) rates, which may then set the tone for yet another revised FX policy, according to Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham.
The BDC exchange rate is N399/$.
“After the convergence, we could see a devaluation that will ensure that the spread between CBN, BDC and parallel market rate is not more than N5,” Ibrahim said.
This will then snuff out incentives to divert dollars to the parallel market and signal improved liquidity in the official market, according to Ibrahim.
“In the space of one week, we have seen the two negative factors in the fx market reversed,” Ibrahim said, referring to plunging external reserves and depreciating naira. “But now, external reserves are rising and the naira is gaining. I will advise speculators to steer clear to avert unprecedented losses because the market could swing any way,” Ibrahim added.
On the back of the CBN’s dollar interventions, the exchange rate has continued to slide and has cost speculators millions of naira, one trader told BusinessDay.
The dollar exchanged for N525 at the parallel market on Monday before the CBN’s announcement. It then tumbled to N508 on Tuesday and N501 on Wednesday. By Friday, it closed at N460/$, 4 percent up from N480 the previous day.
“Speculators that bought dollars at N500 are reeling from the current interplay in the market which came as a shock to all,” another trader said.
Nigeria’s external reserves touched a 16-month high in February, at $29 billion, halting a rout of consistent declines in the last one year as the CBN dipped its hand into reserves to defend the naira.
Reserves are rising on the back of higher oil prices and the relative calm in the Niger-Delta which has seen production recover to around 1.9 million barrels per day from an historic low of 1.2 million barrels last April.
Bogged down by low oil output and dollar shortages, Nigeria’s economy erased over two decades of positive growth, to contract in the three successive quarters last year.
The National Bureau of Statistics (NBS) is likely to confirm that the economy saw a full-year GDP contraction for the first time in 25 years.
Documents from the ministry of budget and national planning point at a 1.5 percent contraction in the fourth-quarter of 2016 ahead of the NBS report.
“Improved dollar supply would help bring some relief to the economy in the first or second quarter of this year,” said Ibrahim of Chapel Hill Denham.
LOLADE AKINMURELE
