Nigeria’s central bank said there’s “no cause for alarm” after its policy of restricting the supply of dollars caused the naira to plunge and foreign- exchange trading between banks to seize up. The currency fell 5 percent to 131.50 per dollar this week, with trading “more or less dead” today and no support from the central bank, said Bola Adegbite, a currencies analyst in Lagos for Sterling Bank Plc.
The central bank plans to “participate in buying and selling foreign exchange at the interbank market,” central bank Governor Chukwuma Soludo said late yesterday in a phone interview from the eastern city of Enugu.
“For those who are speculating on the naira, we’ll make sure that they bear heavy losses,” Soludo said. “There’s absolutely no cause for alarm.”
Africa’s biggest oil-producing nation limited sales of dollars to as little as $100 million in auctions this week from more than $800 million last month, as it seeks to preserve foreign-currency reserves amid dwindling export earnings. Nigeria’s cash reserves dropped 4.3 percent to $55.9 billion in November, the central bank said yesterday.
The shortage of dollars has prevented trading in naira between Nigeria’s commercial banks, which demanded more than $1 billion of U.S. currency at auctions in the past month, Citigroup Inc. said.
Investors Exit
Oil production in Nigeria will drop to 2.29 million barrels a day next year from 2.45 million barrels in 2008, President Umaru Yar’Adua said this week when announcing the national budget. Crude accounts for about 80 percent of the west African government’s revenue and 90 percent of exports.
Crude prices have tumbled as much as 69 percent since reaching a record $147.27 on July 11.
Banks’ demand for dollars has increased as investors pull out of emerging-market assets amid the worst financial crisis since the Great Depression. Nigeria’s benchmark stock index is headed for its first annual decline in nine years after falling 47 percent, according to data cited by stock exchange spokesman Sola Oni by telephone from Lagos, the nation’s commercial hub. The measure has lost 6.8 percent this week to 30,768.19.
“A lot of foreign investors are exiting the country, which has generated huge demand for dollars,” said Rubens Iwakura, a London-based currency trader at BNP Paribas SA, the bank with the most accurate exchange-rate forecasts in a 2007 Bloomberg survey. “If the central bank continues to disappoint the market by limiting dollar sales it could precipitate further weakness in the currency.”
The naira may weaken to 135 per dollar this month if the central bank persists in restricting the sale of dollars to commercial banks, Iwakura said before Soludo’s comments.
Femi Olatunde, a central bank spokesman in the capital Abuja, said he couldn’t confirm if the central bank has participated in the market.
‘Lack of Transparency’
Banks demanded $1.3 billion of the U.S. currency in a Nov. 26 auction, 12 times the amount sold, according to Standard Bank. The central bank sold $180 million in foreign reserves yesterday to commercial banks, according to Standard Bank, Africa’s biggest lender.
Interbank trading stalled because policy makers wouldn’t disclose the rate of exchange at which bids would take place in local currency, making banks reluctant to participate in the auctions, said Leon Myburgh, a fixed-income and currency strategist for sub-Saharan Africa at Citigroup in Johannesburg.
The central bank’s “lack of transparency” in signaling to banks the amount of dollars it is willing to auction has made traders reluctant to participate in auctions, said Myburgh. “That’s a big reason why interbank trade has ceased to function properly,” he said.
Disappearing Market
The demand for dollars caused the naira to drop from 117.83 on Nov. 26, when the central bank first reduced the amount of dollars sold, according to Citigroup. The naira fell more than 9 percent this year.
The naira could weaken to 140 per dollar by early next year should Nigeria’s central bank continue to limit the supply of dollars to commercial banks, Myburgh said.
“There’s a difference between achieving a more competitive exchange rate and the disappearance of the foreign-exchange trading market,” Michael Hugman, an emerging-markets currency strategist at Standard Bank’s London office, said yesterday.
Bloomberg News
By Paul Okolo and Garth Theunissen
Garth Theunissen in Johannesburg gtheunissen@bloomberg.net; Paul Okolo in Lagos pokolo@bloomberg.net
04-Dec-2008
