Central Bank of Nigeria Auctions $876.26 Million to Strengthen Naira
The Central Bank of Nigeria (CBN) has auctioned $876.26 million to end users through bids submitted by 26 commercial banks, marking its latest effort to stabilize the ailing naira. This intervention in the foreign exchange market led to an appreciation of the naira on Wednesday, with the exchange rate improving to N1,596.52/$ from N1,601/$ the previous day.
The auction, conducted on August 6, 2024, aimed to enhance foreign exchange liquidity, alleviate demand pressures, and support price discovery in line with the apex bank’s objectives.
According to a statement from the CBN, signed by Omolara Omofunde Duke, Director of the Financial Markets Department, the naira has fluctuated between N1,450 and N1,600 in recent months. For this Retail Dutch Auction, the CBN set a cut-off rate of N1,495/$.
The statement highlighted that these measures are part of the bank’s broader strategy to stabilize the currency and improve market conditions.
“A total bid valued at $1.18bn was received from 32 Authorized Dealers Banks, of which, bids valued at $876.26m from 26 banks qualified, while bids valued at $313.69m from six banks were disqualified.
“In line with the objective of the CBN to boost FX liquidity to the market as well as promote price discovery, the bank approved a cut-off rate of N1495/$ for the Retail Dutch Auction where bids valued at $876.26m from 26 banks qualified.”
It noted that all end-user accounts will be funded with the naira equivalent of their bids by Wednesday, August 7, 2024, while settlement for the successful bids is scheduled for Thursday, August 8, 2024.
Explaining the auction process, the director said a total bid valued at $1.18bn was received from 32 authorised dealers banks while bids valued at $313.69m from six banks were disqualified.
Of the disqualified bids, four banks submitted their bids after the cut-off time of 3:00 pm, while two banks did not provide bids in the template submitted.
Also, all bids with Form Q, and unverifiable Form A and Form M on the Trade Portal were disqualified.
The statement added that “Authorised Dealer Banks were required to submit a comprehensive template that contains the details of Forms A and M of all the outstanding trade-backed unmet FX demand of their customers via email on Tuesday, August 06, 2024, between 9:00 am and 3:00 pm.
“The templates were all password protected with the passwords submitted to the CBN after the deadline for the submission of the bids. Thereafter, the bids were opened and collated.”
It further stated, “To ensure the transparency of the process, the total bids submitted by banks and all qualified bids for payment will be published on the website of the Central Bank of Nigeria for the information of the general public.”
Central Bank of Nigeria Implements Retail Dutch Auction to Address Foreign Exchange Demand
Last week, the Central Bank of Nigeria (CBN) introduced a Retail Dutch Auction System aimed at tackling the rising foreign exchange demand from end users. The initiative seeks to ease pressure in the FX market and stabilize the naira’s exchange rate.
The auction follows increasing “unmet foreign exchange demand,” which has exacerbated demand pressures and adversely affected the naira’s exchange rate, according to a CBN circular issued to lenders. Seasonal demand from summer tourism and import-dependent businesses seeking U.S. dollars have put additional strain on the naira.
Charles Sanni, CEO of Cowry Treasurers Limited, commented that the CBN’s intervention would likely support the naira against the dollar and disadvantage speculators. However, he cautioned that while the intervention is necessary, it may not be sustainable due to potentially insufficient foreign reserves.
Sanni explained, “The CBN’s move improves market liquidity and should strengthen the naira, leading to a better exchange rate. Speculators may face losses and panic sell, potentially causing a significant drop in the exchange rate. However, concerns about the CBN’s ability to maintain this intervention given its reserve levels suggest that the gains may be short-lived without strategic fiscal policies to boost economic productivity.”
Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, supported the CBN’s intervention, highlighting the negative impact of naira volatility on the economy, businesses, and investor confidence. Yusuf emphasized the importance of the CBN’s role in managing FX inflows, particularly from the oil sector, and advocated for periodic interventions to ensure stability.
Yusuf stated, “The intervention is commendable as the CBN is crucial in managing our major FX inflows. Stability in the foreign exchange market is essential for economic growth and investor confidence. The CBN’s efforts to mitigate volatility and ensure a sustainable exchange rate are steps in the right direction.”
Overall, the CBN’s recent auction and the Retail Dutch Auction System are seen as key measures to address the foreign exchange challenges and support the naira’s stability in the face of ongoing economic pressures.
He said, “What CBN has done is improved liquidity by the way of supply to the market. So its expected impact, which we are already seeing, is that the naira will begin to firm up, meaning that it would trade at a better exchange rate.
“Two things it creates immediately is that for the guys who are speculating, it is a loss position for them so they may have to come to the market to sell. So, you are likely to see some level of panic trading on those who are speculating on the naira which will massively drop the rate.
“There is also the neutral position where people will say they are not going to sell immediately because it is still unsure if CBN has the war chest to continue to intervene looking at their reserve. How well they can sustain it is the critical issue which is a function of the supply. If you look at our reserves, this auction system doesn’t look sustainable.”
On his part, the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, applauded the intervention by the apex bank, stressing that the naira volatility has negatively impacted the economy and business and reduced investors’ confidence.
He said, “The intervention is welcome because the CBN is the custodian of our major FX inflows, especially from the oil sector. To ensure stability and reduce volatility in the foreign exchange market. The CBN must intervene from time to time at an exchange which the CBN thinks is sustainable. This is what we have advised all along, and it is good that the CBN is doing that.
“Volatility is very bad for the economy, for business and investors confidence. So what the CBN is doing is to see how it can ensure some stability in the exchange rate.
“The Dutch option perhaps is trying out different models or intervention because we are still contending with volatility, so maybe it is a question of looking at another model that may work better to ensure stability.”
Impact of CBN Policy on Naira Exchange Rate
The Central Bank of Nigeria’s recent policy intervention had a noticeable impact on the foreign exchange market on Wednesday. Data from the FMDQ Securities Exchange Limited indicates that the naira appreciated against the U.S. dollar, trading at N1,596.52/$ compared to N1,601/$ the previous day. This represents a marginal appreciation of 0.3% or N5.
During trading, the naira reached an intra-day high of N1,628 and a low of N1,520 per dollar. Additionally, the dollar supply increased significantly to $93.92 million from $61.90 million recorded on Tuesday, which had been the lowest level since January. This surge in dollar supply reflects a more active market with improved liquidity, following the CBN’s intervention.