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CBN: Why We Closed Forex Windows

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Stories by Akin Akinremi

Despite the devaluation of the Naira in November 2014, the apex bank has taken a further step to address the demand problem by adopting new measures to save the local currency from decimation..

The CBN scrapped the bi-weekly foreign exchange auction window to undercut those manipulating the system through round tripping and spurious demands.

Apart from stopping the bi-weekly sale of dollars, it also directed that all foreign exchange should be channeled to the interbank foreign exchange market.

Explaining the rationale behind the move, CBN’s Director of Communications Ibrahim Muazu said the float exchange rate regime, which the Bank had adopted following the liberalization of the foreign exchange market, had for the most part been successful in ensuring exchange rate stability in line with its mandate.

He said in recent times, with the sharp decline in global oil price and the resultant fall in the country’s foreign exchange earnings, the Bank had observed a widening margin between the rates in the interbank and  the rDAS window, thus engendering undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.

This, according to CBN, has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public.

“In view of the foregoing, it has become imperative that appropriate actions be taken to avert the emergence of a  multiple exchange rate regime and preserve the country’s foreign exchange reserves,” he said.

Consequently, all authorized dealers and the general public were told that, with effect from Wednesday 18th February, 2015, the rDas/wDAS foreign exchange window at the CBN would be closed. Henceforth, all demand for foreign exchange are to be channeled to the interbank foreign exchange market.

However, stakeholders in the financial sector have been reacting to the the policy shift.

Some said the policy was ill-timed and that it would push up the rate to close to N250 a dollar, which will continue to increase panic in the sector.

“This is not the right time to council rDAS/wDAS now that there is great panic in the forex market,” they said.

But to Razia Khan, the Head, Macro Research Africa at Standard Chartered Bank, the policy is a “positive news, and should help create more transparency in the Nigerian market.”

Khan warned that with oil prices currently at levels where foreign exchange reserves will be difficult to replenish, the CBN’s appetite for continued support of the interbank foreign exchange rate would be closely monitored.

She further stated that with the foreign reserves under pressure, and amid growing concern that a wide RDAS-interbank spread would encourage “round-tripping , the CBN would now stop rDAS auctions thereby effectively discounting its foreign exchange subsidy for certain categories of demand.

The CBN had said for the avoidance of doubt, all authorised dealers and the general public should note that the CBN would continue to intervene in the interbank foreign exchange market to meet genuine/legitimate demands.

Meanwhile, the apex bank sold dollar on Wednesday at the interbank market to banks at N198.

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