Nigeria’s central bank scrapped its bi-weekly currency auctions on Wednesday and a market body said it would sell dollars only at 198 naira, a move that amounts to a de facto devaluation of the currency of Africa’s biggest economy.
With elections due in less than six weeks, the changes let the central bank rein in its defence of the naira, on which it was spending more than $100 million a day, while avoiding the politically unpalatable word “devaluation”.
FMDQ, a group comprising Nigeria’s main commercial banks and the central bank, said commercial banks had also been banned from re-selling central bank dollars among themselves, another attempt to end speculation in the naira.
The currency has lost more than 20 percent in the past three months as oil prices collapsed and concern grew about political stability after the six-week postponement of the February 14 presidential elections. Nigeria is Africa’s top oil producer.
The scrapped dollar auctions made up only 10 percent of all FX trade, and abandoning them meant the central bank had effectively ditched its official 160-176/dollar target band, said Segun Agbaje, chief executive of GT Bank and an FMDQ director.
Under new trading rules, banks will only be able to purchase foreign exchange if they have a prior order from a corporate customer, such as a fuel importer or foreign mobile phone company looking to repatriate profits or dividends.
Any outstanding dollar demand at the end of each trading day would be met by the central bank at 198, FMDQ vice chairman Jubril Aku told a news conference.
“Starting from Friday, the interbank market is order-based — essentially filling orders of customers,” he said.
In a statement, the Central Bank of Nigeria (CBN) did not stipulate the level at which it would sell dollars, but said it would continue to intervene “to meet genuine/legitimate demands”.
Its reserves have dropped 25 percent over the last year to $33 billion, a rate of depletion that most analysts said was unsustainable.
“This not only allows the CBN to save FX reserves but also effectively gets rid of the distortion of two exchange rates,” said Razia Khan, the head of Africa research at Standard Bank in London. “It looks like this is a devaluation of the currency and a new peg at the rate of 198.”