ON the first day of the implementation of the new Central Bank of Nigeria, CBN, flexible exchange rate policy, the Naira Monday slumped 30 percent against the dollar after the apex bank removed its peg to alleviate chronic foreign currency shortages choking
growth in Africa’s biggest economy. The CBN sold $530 million at the auction at 280 naira per dollar with 21 banks participating, traders said. Black market currency dealers were quoting the naira at between 325 and 345 naira to the dollar, up to 10 percent stronger
than on Friday on expectations more forex liquidity on the interbank market would reduce demand on the street. However, the CBN was bubbly as it cleared all the backlog of $4 billion pent-up demand for foreign exchange on the day Nigeria’s new foreign exchange market took- off. The Acting Director Corporate Communications of the Bank, Mr. Isaac Okorafor, last night expressed happiness for meeting the CBN’s objectives of clearing the FX demand backlog, perform its role as strictly market intervention participant, re-launch a functioning and efficient inter- bank market. He said “the CBN, in line with its desire to promote a transparent, liquid and efficient market, and in order to engender market confidence and ensure credible price formation, intervened in the market through a special Secondary Market Intervention Sales (SMIS) addressing the issue of the FX demand backlog by clearing $4.02 billion through spot and forward sales. This served in no small way to stimulate price discovery, with the determination of a marginal rate of $/280.00 through the Special SMIS process. “So, we can state to you categorically, that the FX demand backlog has now been cleared and behind us for good.” Mr. Okorafor assured market participants and the general public that the apex bank was resolutely committed to making the Nigerian FX market globally competitive, credible, transparent, liquid, and efficient. He lauded market participants that collaborated in their conduct to achieving these feats and looked forward to another successful and historic day on June 27, 2016, when the market launches its innovative hedging product, the Naira-settled OTC FX Futures. The naira had traded just twice by midday, at 255 to the dollar, before the CBN launched a special auction to clear a backlog of hard currency orders. Less than $1 million changed hands, prompting an extension of the trading day to 5 p.m., dealers said. Monday’s rate was sharply weaker than the 197 peg the CBN had maintained for 16 months before abandoning it last week in a bid to alleviate chronic forex shortages and stop the economy from sliding into recession. The CBN had said it may inject foreign exchange into the interbank market to boost liquidity and reduce a backlog of $4 billion backlog of demand which could take four weeks to clear. According to Reuters News agency, “Non-deliverable forwards – contracts used to bet on future exchange rate moves – priced the naira at 295 per dollar in one month’s time after initially hitting its weakest ever level at 310. “The two-month contract saw the naira at 304 per dollar in August while one year down the line the naira was priced at 349.” The CBN is “reasonably optimistic” the naira will settle at around 250 to the dollar after an initial period of weakness following a flotation, the bank’s governor said in a June 3 letter to President Muhammadu Buhari. Foreign investors and economists had called for a naira devaluation for months as the forex shortages hit economic growth and led to widespread capital flight. The CBN said last week it would abandon the peg in a “managed float”. The median forecast from 10 analysts surveyed by Reuters had suggested it could trade on Monday at many as 300 naira per dollar. Nigeria’s economy, which contracted by 0.4 percent in the first quarter, faces its worst crisis in decades as a result of the decline in oil prices since 2014 and last year’s introduction of a currency peg. With a likely sharp fall for the naira, Nigerian products will become relatively cheap and imports more expensive, which should stimulate the domestic economy but is likely to light a fire under already rising inflation. “The new system should reduce the shortage of FX in the economy and – in the long run – reduce strains in the balance of payments by discouraging imports and boosting export competitiveness, but the new system certainly does not mark the end of Nigeria’s economic problems,” said John Ashbourne of Capital Economics. The Organisation of Petroleum Exporting Country, OPEC, oil exporter had resisted devaluing the naira for more than a year, even as other major oil producers, including Russia, Kazakhstan and Angola, allowed their currencies to fall after crude prices collapsed.

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