ON THE DUTCH AUCTION SYSTEM (DAS) IN
at N126 as Dutch Auction Debuts
Bids as high as N135.99
By Ayodele Aminu
Indications that the naira may continue its depreciation course emerged
yesterday at the newly introduced Dutch Auction System (DAS) as banks on behalf
of their customers offered to pay as much as N135.99 to exchange for a United
According to the result of yesterday’s DAS transactions obtained from the
Central Bank of Nigeria (CBN), Zenith Bank quoted the highest successful bid
rate of N135.99 to a dollar while seven other banks quoted the lowest successful
bid of N126 to a dollar.
The DAS, a bi-weekly trading system, was introduced by the CBN at the weekend to
replace the daily Inter-bank Foreign Exchange Market (IFEM) and which is to be
moderated by the apex bank.
As at last Friday, the naira had exchanged for N125.65 to close the week at IFEM.
The CBN had Monday offered for sale $40 million which was overshot by over $1
million and purchased by 17 banks out of 22 that sent their bids and had
demanded $62.64 million. The CBN sold $41,052,898.49 to the 17 banks.
The CBN said it rejected the bids of five banks whose documentations were not
presented based on the stipulated requirements.
While some of the banks’ customers had no corporate registration number, others
used one number for several companies. Some also gave insufficient company
address while other bids were below the marginal bid rate.
In the transaction analysis released by the CBN last night, rates quoted by the
banks as against the dollar were as follows: Zenith Bank N135.99, Investment
Banking and Trust Company (IBTC) N131.10, Guaranty Trust N130.50, Access Bank
Limited N129.95, Marina International Bank N127.50, United Bank for Africa (UBA)
quoted between N127 to N128 and Wema Bank Plc quoted between N126.50 to N127.25.
Others are Capital Bank International N126.65-N127.25, Societe Bancaire
N126-N126.50, Trust Bank N126.65, MBC International Bank N126-N126.50, NAMBL
N126, Afribank N128.50, Regent Bank N126,15, Gateway Bank N126 and Chartered
The transaction analysis showed that Access Bank and IBTC were successful in all
their request while Chartered, UBA and Societe Bancaire could not get all they
had asked for.
Those whose bids were outrightly rejected by the apex bank are Union Bank,
Standard Chartered, First Bank, Indo-Nigerian Bank and ACB International Bank.
In all, the apex bank rejected bids totalling $21.6 million.
It would be recalled the naira lost a total of N4.50 last week. Last month
alone, it lost a total of N3.30. Since the beginning of this year, the naira
which opened the year at the exchange rate of N113.45 has lost a total of
The CBN, in a circular announcing the introduction of DAS, had explained that it
would be announcing at 8.30 am on Mondays and Wednesdays the amount on offer for
each auction at both its Abuja and Lagos offices.
The circular reads: “Under this system, authorised dealers shall submit their
customers’ on Mondays and Wednesdays. The CBN reserves the right to reject bids
deemed to be unrealistic and/or any application that contravenes foreign
The dealers are also expected to submit their customers’ bids duly signed by two
authorized signatories for any particular auction session between 9.00 am and
12.00 noon of the day of auction, it added.
The minimum bid amount by authorised dealers, CBN stated, is N100, 000 and the
currencies of transaction shall be naira and United States dollar.
DAS was the system in place in the country from 1987 to 1989. Incidentally, it
was discarded because of volatility of naira exchange rate during its regime.
A dwindling oil revenue and worsening balance of payment led to the partial
liberalisation of forex regime in 1986. In that year, CBN introduced the Second
Tier Foreign Exchange Market (SFEM). While the first tier market was officially
designated for all official transactions of government, the second tier market
was used for other commercial transactions.
This was probably the first time Nigerians were granted the right to hold
foreign exchange accounts and to carry out commercial transactions with it.
From 71 kobo $1.00 in 1970, the official exchange rate appreciated to a peak of
55kobo/$1.00 in 1980 before losing value to 89kobo/$1.00 in 1985.
The official exchange rate crossed one naira to a dollar mark for the first time
in March 1986, when it exchanged N1.0016/$1.00.
CBN, however, sharply devalued the naira by over 250 per cent from N1.32/$1.00
to N4.64/$1.00 in September 1986.
Government explained then that it was meant to encourage rapid expansion in the
revenue derivable from non-oil exports and to achieve the other objectives of
Structural Adjustment Programme (SAP).
Government, however, discarded the policy of fixed exchange rate and adopted a
policy of guided deregulation of the forex market in 1995.
The Autonomous Foreign Exchange Market (AFEM) was then born in 1995. Towards the
end of September 1999, AFEM gave way to IFEM, which held sway till last week.
The re-introduction of the Dutch Auction System
could be the messiah for our desperate foreign exchange market. But what exactly
is it and is how we bid for foreign exchange the real problem? Isioma Daniel
attempts to decipher the recycled CBN venture
are the days when the naira was so closely pegged to the dollar, that N5 or less
could buy you a piece of Uncle Sam. This sounds like a fairy tale or an urban
myth. Was there really ever a time in Nigeria when people were willing to pay so
little for foreign exchange? It seems so. It is also quite interesting to note
that the people old enough to remember such good financial days are now holding
the top economic decision making spots in the Central Bank.
On July 18 these old ‘wise’ men recently scrapped the 30 months old Inter-bank
Foreign Exchange Market (IFEM) in favour of the Dutch Auction System (DAS).
According to the Central Bank, IFEM was dropped because an overwhelming demand
for forex was outstripping supply. Nigeria is heavily dependent on imports so
businesses need foreign currency to pay for the goods they buy from other
countries. The negligible amount we export is usually in its crude state. This
is particularly true for our number one exported commodity – oil. Proceeds from
the sale of crude oil are the source of 98 per cent of the nation’s foreign
During IFEMs days the demand for foreign exchange was hovering between $35
million and $50 million a day. Meanwhile, Nigeria’s foreign reserve has been
persistently crashing, with each new month recording a further drop. In January
2001 our foreign reserves registered $10.116 billion and fell to $9.23 billion
in August 2002. The country’s gross external reserves at the end of May amounted
to $9, 226.3 million representing a decline of 1.9% from the $9, 403.4 million
recorded in April 2002.
The naira has also continued a dangerous slide, depreciating at an alarming rate
from N83.8 to one US dollar in 1999 to N125.65 to one US dollar, hence naira has
lost 4,185 kobo or 49.58 per cent of its original value under the present
management of the CBN. No wonder the inflation rate, which was 13.5 per cent in
1999, rose to 18.9 per cent at the end of 2001.
This might all sound like goobly gook to the non-business mind. However, it
doesn’t take an expert to see that since the introduction of DAS, the dollar has
been selling at N135.00 compared to the N125.65 it was trading at on the last
day of IFEM and Nigerians are now spending N203.50 to buy a pound. One pound
that can barely get you a bus fare or a weekend newspaper in London can buy you
a taxi ride in Nigeria, if you are lucky.
You don’t need a Harvard graduate to tell you that it is an underestimation to
say this doesn’t bode well for the nation’s economy. It’s quite a depressing
picture but before your mind is blown apart by complicated business terms, you
need to understand what exactly the Dutch Auction System is and how it works and
if it will heal our sick exchange rate.
The A-Z of DAS
Dutch Auction System is popularly used as a bidding method on those internet
auction sites that claim to sell everything from a new heart to diamonds. In
this format the seller places one or more identical items on sale at the same
time listing a minimum required price. Bids are ranked in order of price, then
quantity, and lastly time. These auctions are timed events usually lasting
either hours or days. Bidders submit the number of items they want and how much
their bid per item is. The final selling price in this type of Dutch auction is
determined by the lowest of the winning bids.
Another name for it is the descending-price auction, commonly known in academic
literature as the Dutch auction. It is the technique used in Netherlands to
auction produce and flowers (hence, a “Dutch” auction). It uses an open format
rather than a sealed-bid method.
the DAS bidding takes place on Mondays and Wednesdays. The minimum bid amount by
an authorised dealer is $100, 000.00 and the currencies of transaction are the
naira and the United States dollar. The CBN announces every Tuesday and Thursday
the result of each auction and the official exchange rate.
is not alone in using the Dutch Auction System.
Dutch auctions have been used to finance credit in
Romania and for foreign
exchange in Bolivia, Jamaica and Zambia. In America the national treasury
sometimes uses it to sell its new treasury notes or treasury bonds. The Treasury
opens up all bids and determines the lowest acceptable bid price. All successful
bidders pay this stop-out price.
An example could make it clearer. Let’s say the Central Bank has 20 million US
dollars on sale and the minimum selling price for a dollar is N20. Buyers can
ask for as much as they want as long as it is not lower than $100, 000. Five
companies bid N30 for one dollar each and ten others bid N50 for one dollar.
These fifteen companies will want different quantities of dollars. Some would be
bidding for $6 million, while others would be bidding for $20 million. Because
the ten companies bid higher than the other five, they will definitely be
guaranteed foreign exchange. But all fifteen companies will pay N30, the lowest
successful bid. It is this minimum price that becomes the Central Bank’s
exchange rate. Anyone who wants to buy a dollar from the central bank will pay
It might sound complicated, but the majority of Dutch auctions are simple. Most
users win the items they bid on at the minimum asking price. Here are the key
_ Sellers start by listing a minimum price or starting bid for one item, and the
number of items for sale.
_ Bidders specify both a bid price and the quantity they want to buy.
_ All winning bidders pay the same price per item – which is the lowest
successful bid. This might be less than what you bid!
_ If there are more buyers than items, the earliest successful bids get the
_ Higher bidders are more likely to get the quantities they’ve asked for.
_ Proxy bidding is not used in Dutch Auctions.
_ Bidders can refuse partial quantities. For example, if you place a bid for 10
items and only 8 are available after the auction, you don’t have to buy any of
This isn’t the first time that the Dutch Auction System has been used to sell
forex in Nigeria.
DAS had earlier being implemented in
April 2, 1987
and December 14,
1990. It was scrapped because it failed to improve the dire exchange rate
Will It Work This Time?
Considering that DAS was used twice and it failed on both occasions, no one is
placing bets in favour of it succeeding again. Why? There are two major flaws to
the DAS system. The first one is that demand tends to exceed supply and although
everyone pays the lowest successful price, DAS actually does more favours for
the high bidders. How?
Its success in reducing excess demand of foreign exchange is hinged on the
Central Bank’s ability to reassure bidders that there is more than enough
foreign currency to meet their needs. If they can do this, the naira will
appreciate with every trading session. However, every Nigerian is aware that the
nation’s foreign and external reserves have been reducing every month because of
capital flight and falling crude oil prices. In January 2001 our foreign
reserves registered $10.116 billion and fell to $9.23 billion in August 2002.
The country’s gross external reserves at the end of May amounted to $9, 226.3
million representing a decline of 1.9% from the $9, 403.4 million recorded in
April 2002. Yet government spending has been on the increase since the beginning
of the year, culminating to a deficit of N93.2 billion within the same period.
So despite statements by the CBN Deputy Governor, Monetary Policy, Dr Earnest
Ebi that “we are in a position to put out any amount of foreign exchange we want
to put into the market. We are not just flying blind, we have a pre-determined
view of where we are going and we are not going to allow any arbitrariness in
the system,” it seems buyers are not convinced.
This week out of the $85 million offered for sale by CBN, the total amount
demanded by 42 banks stood at $107 million. Demand outstripped supply by $22.02
million. Also, the seventy-two successful bids amounted to $88 million so CBN
overshot its amount on sale by $3.14 million.
Demand exceeding supply is the key flaw of the DAS system and it can only lead
to further depreciation of the naira. On Tuesday the naira depreciated by N1.00
against the US dollar at the seventh session of the DAS. It is important to note
that the excess demand led to the naira’s depreciation. The naira has
persistently appreciated on the two occasions when CBN flooded the market with
It appreciated two Friday’s ago when the CBN exceeded the $150 million it
offered by $46 million. It also firmed up last week Wednesday when a total of
$115 million was offered. CBNs ability to keep the forex storehouse adequately
stocked up is the key to DASs success, but with the strained foreign reserves
this might not be possible.
Already financial analysts are criticising the CBN of a big conspiracy to dump
the blame for high exchange rates on buyers. Is there any justification behind
this claim? There could be.
If you are the lowest bidder in a Dutch auction and you specify a multiple
quantity, you may not get to purchase all that you specify. Why? Because there
may be little left over after the high bidders get their share. So although
everyone pays the lowest price, those who bid the highest are more likely to get
the amount of forex they requested for. The only way to avoid this problem is to
make sure you are not the lowest bidder! If everyone is trying to make sure they
are not the lowest bidders then the end result will be a high exchange rate.
This is the second flaw of the Dutch Auction System.
Is There A Better Alternative?
is no doubt that the three-year-old IFEM aggravated the huge gap between the
parallel market and the official market. As soon as IFEM was introduced banks
began to exploit the system making speculative and artificial demand for forex,
which was thereafter sold at a higher exchange rate at the parallel market. It
is believed that about 60 to 70 percent of demand for forex in IFEM were
speculative or artificial demand as reflected by the amount of forex involved in
the forex malpractice perpetrated by the 21 banks recently banned from IFEM.
The root of our exchange problem is Nigeria’s dependence on imports. Nigeria
imports the most basic of goods, including goods that we produce in the country.
This creates pressure on the naira and an exaggerated demand for foreign
exchange. Also as capital spending increases and the government awards
contracts, businessmen need more foreign exchange to bring their goods into the
Concerning the parallel market, anyone who has ever been through the long and
headache inducing process of buying forex from the CBN knows that the appeal of
bureaux de changes and black markets is hard to resist. If the CBN really wants
to discourage people from patronising the black market it needs to make it
easier for honest individuals and companies to buy from the CBN while creating
disciplinary measures for some of our dodgy banks and businessmen. According to
an analyst when most businessmen calculate the hassle as well as expense of
buying from the CBN they eventually decide to go to the simple, less difficult,
less questioning black market. CBN should reduce the red tape and actively
promote the apex bank as the most profitable and efficient avenue for foreign
exchange there is.
Obviously, the burden doesn’t lie only on the CBN. The federal government has to
make macro-economic steps to industrialise our economy. Wouldn’t it be great to
see trucks taking finished goods to foreign countries for export? Or to walk
into a supermarket and sixty percent of the goods are from our factories and
As for the new initiative, only time will tell if it is going to be third time
lucky for the Dutch Auction System.
DAS, was the system in
place in the country from 1987 to 1989. Incidentally, it was discard because
of volatility of naira exchange rate during its regime.
A dwindling oil revenue and worsening balance of payment led to the partial
liberalisation of forex regime in 1986. In the year, CBN introduced the Second
Tier Foreign Exchange Market (SFEM). While the first tier market was
officially designated for all official transactions of government, the second
tier market was used for other commercial transactions.
This was probably the first time the Nigerian citizens were granted the right
to hold foreign exchange accounts and to carry out commercial transactions
From 71 kobo $1.00 in 1970, the official exchange rate appreciated to a peak
of 55kobo/$1.00 in 1980 before going losing value to 89kobo/$1.00 in 1985.
The official exchange rate crossed one naira to a dollar mark for the first
time in March 1986, when it exchanged N1.0016/$1.00.
CBN however sharply devalued the naira by over 250 per cent from N1.32/$1.00
to N4.64/$1.00 in September 1986.
Government explained then that it was meant to encourage rapid expansion in
the revenue derivable from non-oil exports and to achieve the other objectives
of Structural Adjustment Programme (SAP).
Government however discarded the policy of fixed exchange rate and adopted a
policy of guided deregulation of the forex market in 1995.
The Autonomous Foreign Exchange Market (AFEM) was then born in 1995. Towards
the end of September 1999, AFEM gave way to IFEM.
February 9 -
February 15, 2004
CBN amends forex
By Alao Salimon
Central Bank of Nigeria (CBN)
has amended the foreign exchange guidelines in order to reduce capital flight.
The apex bank said a