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Forex: CBN Intervenes, Sells $500m in 1 Day

Posted by By Ayodele Aminu on 2005/08/24 | Views: 348 |

Forex: CBN Intervenes, Sells $500m in 1 Day

In the biggest single intervention since deregulation of the foreign exchange market, the Central Bank of Nigeria (CBN) yesterday notified banks of its intention to inject $500 million into the market today.

In the biggest single intervention since deregulation of the foreign exchange market, the Central Bank of Nigeria (CBN) yesterday notified banks of its intention to inject $500 million into the market today.

Immediately after the notice was given, the naira exchange rate against the United States’ dollar at the inter-bank market, known in banking parlance as the export proceeds market, appreciated by almost N3 yesterday, dropping from N137.50 per dollar to N135 at the close of business.

The special auction, which according to CBN, is meant to assist the private sector in growing the economy, will run alongside the bi-weekly Dutch Auction System (DAS).

The CBN circular informing banks of its intention to begin a special auction reads in part:”The CBN hereby offers the amount of $500 million for sale at the foreign exchange market on Tuesday August 23, 2005. This special auction is meant to assist the private sector in the efforts of growing the economy.”

The circular dated August 22, and signed by CBN’s Director, Trade and Exchange Department, Abuja, Mrs. Omolara Akanji advised authorized dealers to “submit bids on their own account to the CBN Lagos (at the address stipulated in the revised FEM guidelines) between and 12 noon.”

Titled “Foreign Exchange Market Special Auction,” the circular reminded authorized dealers “that their current account with the CBN must be adequately funded on the day of bidding and the account should remain funded at the time of disbursement, failing which the bids will be disqualified.”

Besides, the circular advised authorized dealers “to know that the clearing rate to be arrived at by the CBN after submission of bids shall be the clearing rate to be advised to all authorized dealers.”

With the re-introduction of a 1 per cent commission charge on all foreign exchange sales to banks effective from August 1, 2005 by the CBN, If it eventually sells the $500 million it injected into the market, it would be making $5million profit, about N664.3 million when converted with the current naira exchange rate ($132.86 per dollar) at the DAS.

This development has sent bank treasurers back to their drawing board as most of them yesterday hurried to reach out to customers on phone.

The decision to sell this huge amount at a go, according to CBN sources, was informed by the need “to stem the rising tide of inflation, stabilize the foreign exchange market and meet the CBN’s monetary policy target.”

The CBN, according to our sources, “will not hesitate to intervene from time to time so as to ensure the stability and fight inflation.”

CBN believes that the special auction will help drive cost down and help the real sector who depends so much on imported goods for their operations.

Within the last few weeks, there has been demand pressure at the DAS, a development that has prompted the CBN to overshoot its daily forex budget. For instance, last week, demand for dollars increased slightly at the DAS segment of the Nigerian foreign exchange market with a total of $280.756 million dollars demanded by banks that participated at the two auctions. This is against $273.72 billion dollars demanded by the banks previous week.

Following the demand pressure, the apex bank was compelled to offer $270 million dollars last week at the two auctions against $260.00 million dollars that was offered previous week. In spite of the increased demand, the naira exchange rate has remained stable at N132.86 to the dollar in the last two weeks.

The naira has also been relatively stable against the dollar at the parallel (black) market segment of the foreign exchange market as it is still being traded for between N144 and 145.00 naira to the U.S dollar.

Meanwhile, the Central Bank of Nigeria (CBN) may have funded the foreign exchange market with about $2.75 billion within the second quarter of this year through the Dutch Auction System (DAS). This, according to THISDAY forex data, indicates a leap of seven per cent over the $2.58 billion released in the previous quarter.

This means the apex bank may have funded the nation's foreign exchange in the first six months of this year with a total sum of $5.338 billion, indicating an increase of $278 million or 36 per cent over the $5.06 billion in the corresponding period last year. This however shows a decrease of $709 million or 15.3 per cent over the $2.88 billion in the same period in 2003.

The 2005 second quarter figure ($2.75 billion) is also some 0.73 per cent, or $20 million decrease over the $2.73 billion utilised during the same period last year. It is also a slide of five per cent, or $137 million over the 2003 corresponding period's $2.88 billion.

Similarly, the 2005 second quarter figure is $752 million or 38 per cent over the $1.998 billion of 2002.

Unlike the previous years when the naira continued to fall against major currencies, the CBN has continued to build up the nation’s forex reserves, which has risen to about $24 billion as at June.

The Federal government banned goods, which can locally be produced, a development that has also helped to strengthen the naira.

For instance, the naira, that opened the year at the exchange rate of N132.85 to one United States' dollar, has lost only 1 kobo of its original value to stand at N132.86 as at yesterday.

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Comments (3)

Okfold(Sobe, Edo, Nigeria)says...

I want the meaning of female owan name Ekeke (Edo state)

Toluwalase Samuel Olufemi(Ijebu, Ogun, Nigeria)says...

Authority belongs to God, once He decrees it is final and binding

Ikponmwosa Osamede(Edo, Nigeria)says...

Your meaning of Osamede is wrong. Osamede means God has given me a crown