THIS DAY

Naira Crashes against Dollar at Inter-bank Market

•Sheds N1.11 at official market
By Ayodele Aminu, 12.02.2008

Barely five days after the Nigerian currency, the naira, recorded its first major depreciation (99 kobo) in the last three years at the inter-bank foreign exchange market, it continued its free fall yesterday, losing N7 against the United States dollar.
The naira, which had recorded relative stability over the last three years, also shed N1.11 against the dollar yesterday at the official market – the Wholesale Dutch Auction System (WDAS).  It had last Wednesday depreciated by 4 kobo against the dollar.
The inter-bank foreign exchange market is where banks, on behalf of their customers, buy foreign exchange from one another to meet their daily needs, while the WDAS moderated by the Central Bank of Nigeria (CBN) is the official market where foreign exchange end users through their banks bid for foreign exchange.
The WDAS, introduced in February 2006 to bridge the gap between the official and black market, opens for trading twice a week – Mondays and Wednesdays.
The naira, which opened for trading at N117.79: $1 yesterday at the official market, closed at N119.50: $1, because the apex bank could not meet the demand of foreign exchange end users who demanded $1.3 billion out of which the apex bank supplied just $100 million. 
This was also the case last Wednesday when banks demanded $1 billion but got $105 million, prompting the inter-bank market, which had opened at N118.51: $1 to depreciate to an all-year low at N120: $1, before retreating to N119.50: $1. This development had compelled the naira to lose 99 kobo against the dollar.
Further depreciation of the naira at the inter-bank market yesterday, according to market operators, was triggered by the development at the official market where the banking watchdog could not meet the demand.
Given these scenario, the naira, which opened for trading at the inter-bank market yesterday at N119.50: $1, depreciated to an all-year low at N126.50: $1, translating to N7 depreciation against the dollar.
With this development, the gap between the official and inter-bank markets, which coalesced with the liberalisation of the market in August last year, has now been widened by N7, giving room for arbitrage.
The banking watchdog has been rationalising the sale of dollars since Monday, last week, when it sold 30 per cent of demand and 10 per cent last Wednesday before selling 10.3 per cent yesterday.
Authorised foreign exchange dealers of banks who spoke with THISDAY yesterday said the inter-bank market, which usually closes by 4 pm daily, closed by 2 pm because the dollar had dried up in the market and there was nothing to trade.
“The Nigeria inter-bank foreign exchange market shut down today following lack of supply in the market, which was predicated by rationalisation of foreign exchange by the CBN. A key implication of this is that Nigerian banks may start defaulting on their obligations to offshore counterparts. It is therefore imperative that the CBN rescinds this decision and injects foreign currency into the market.
“Apart from negative ratings that these devaluation may attract, the stock market may witness further bearish trend as the offshore investors scramble to exit their positions,” said one the authorised forex dealers.
Commenting on the development, Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said it was a reality check because the dollar was no longer there.
“It is a reality check. It is an adjustment because the dollar is not there any more. The days of cheap dollar are gone forever. We are now facing the hard times. The earlier we accept it the better,” he said.
A top CBN official also linked the naira depreciation to happenings in the global market, where most the developed countries, especially United Kingdom (UK) and US have injected trillions of dollars to safe their financial markets.
“If you have been looking at the CBN’s foreign exchange demand profile in the last four months when the global finance crises began, you would notice that the three foreign banks in Nigeria (Stanbic IBTC Plc, Standard Chartered Bank and Citibank), which used to be the major source of foreign exchange inflow into the country have been having a tight inflow because of the global crises. These three banks have since then been making huge demands at the foreign exchange market because foreign investors in Nigeria are also divesting from the stock market. Hence, there is a lot of outflow,” a top official of the CBN told THISDAY.                                                                                                                                                                                        
All efforts to get an official explanation from the CBN proved abortive.
The decision of the CBN to rationalise sale of foreign exchange, according to market operators, was interpreted to mean that the CBN would encourage some devaluation and look to preserve foreign reserves. 
“It also suggests that the currency could trade at N120: $1 by year end,” said one of the market operators.
Over the past four months, the apex bank had become by far the largest supplier of foreign exchange in the domestic market, controlling almost 90 per cent of total supply as against 10 per cent in the first quarter of the year.
Other supply sources especially foreign direct and portfolio investments: home remittances (Western Union etc) have since dried up as a result of the global liquidity and credit crises.
“Unfortunately, this dry up in supply is coming at a time when letters of credit established 120 days ago are now maturing and due to be paid especially when you consider that commodity prices were at their highest levels then.
“Given that the CBN is now rationalising the sale of dollars and is virtually impossible to restructure the maturing letters of credit with offshore counterparties due to the global crisis, banks then have to scramble for dollars thereby pushing up the prices,” said a market analyst told THISDAY.
Experts, however, insist that the dynamics are less dramatic than generally assumed internationally and the naira remains one of the most stable currencies in comparison with those of most sub-Sahara African countries.
The naira had strengthened from N128: $1 in early 2007 to N118: $1 at the end of 2007, and has remained at below N118: $1 since last January.
Nigeria’s exchange rate is a managed float, with the CBN having an important role in its determination.
Still, as noted in the International Monetary Fund (IMF) article IV published last February, the significance of the inter-bank market has become increasingly more relevant on the back of a rapid growth in supply of foreign exchange from sources other than the CBN in recent years, including portfolio investment, instruments to finance bank capital and inward remittances.