Nigeria’s interbank foreign exchange market remained frozen on Thursday as dealers waited to see how the central bank would act to stabilise the local naira currency after it fell sharply against the U.S. dollar.
Governor Chukwuma Soludo told Reuters late on Wednesday that the central bank was ready to intervene from Thursday to ensure stability after dollar supply all but dried up amid unprecedented demand and banks stopped quoting spreads. He said the central bank would meet all demand at a market determined exchange rate and that the apex bank was ready to buy and sell as necessary.
“The market still remains closed, we are waiting for the central bank intervention. The central bank has called around asking for quotes but it has yet to do anything,” one dealer said.
It sold only $180 million on Wednesday and $100 million on Monday despite demand of about $2 billion, leaving banks scrambling for dollars from other sources
Nigeria’s central bank will intervene in the foreign-exchange market from Thursday to ensure the naira’s stability after the local currency fell sharply against the U.S. dollar, Governor Chukwuma Soludo said.
“We are ready to intervene in the market, beginning from tomorrow (Thursday). The central bank will meet all demand at the forex market at the market-determined exchange rate,” Soludo told Reuters by telephone. He said the central bank was ready to buy and sell as necessary.
The naira weakened close to 8 percent to almost 130 to the U.S. dollar on Tuesday as dealers digested the impact of a budget announcement by the president and reacted to what appeared to be a managed depreciation of the local currency. Banks said no spreads were being quoted on Wednesday on the interbank market as dealers waited for clarity on the central bank’s policy and as dollar supply all but dried up.
The central bank allowed the naira, broadly stable against the dollar for months, to depreciate further at its biweekly auction on Wednesday, selling at between 127-129 compared to around 118 on Monday and 116 a week ago. It sold only $180 million on Wednesday and $100 million on Monday despite demand of about $2 billion, leaving banks scrambling for dollars from other sources. Soludo blamed the naira’s depreciation on speculators.
“Those who have been speculating in the market will be made to pay a heavy price for their actions,” he said. President Umaru Yar’Adua proposed a 2.87 trillion naira 2009 budget on Tuesday, a slight increase over actual spending this year despite lower world oil prices, and sought approval to breach a budget deficit target of 3 percent. That highlighted concern that Nigeria’s fiscal position had been impaired significantly by lower world oil demand and the central bank had decided to allow the naira to weaken.
Dealers said dollar demand was being driven by importers before the Christmas trading season as well as by portfolio investors who have been taking money out of Nigeria as the global credit crisis dampens appetite for risk. It has also been fueled by banks, businesses and individuals — worried by the long-term impact of falling oil prices on Nigeria’s economy — shifting their balance sheets out of naira into U.S. dollars.
One banking analyst said he thought the central bank may have deliberately restricted dollar supply to the market in order to flush out speculators and ascertain the true level of underlying demand.