The Central Bank of Nigeria abandoned weekly foreign-exchange auctions, a key part of its currency-management system, effectively devaluing the naira for the second time in three months, according to a report in Bloomberg.
Supporting the naira through dollar sales at the auctions was draining foreign-exchange reserves without benefiting the economy, the Abuja-based CBN said in a statement on its website on Wednesday, after the gap between market and auction rates for the currency widened to a record on February 12.
“This is an effective devaluation of the official Nigerian naira exchange rate,” Razia Khan, the London-based head of Africa research at Standard Chartered Plc, said in an e-mailed note on Wednesday. “This is positive news, and should create more transparency in the Nigerian market.”
The naira gained 1.4 percent to 196.77 per dollar by 4:28 p.m. in Lagos, rallying for a third day after falling to a record low on Feb. 12.
The central bank, which devalued the naira in November, has attempted to stem the currency’s decline by introducing measures to dry up foreign-exchange trading. The naira has slumped 18 percent in the past six months amid a slide in the price of oil, which accounts for 90 percent of Nigeria’s export earnings and 70 percent of government revenue.
“With reserves declining every day and seen to affect the nation’s ratings, the central bank took the right decision,” Sewa Wusu, head of research at Sterling Capital Markets Ltd., said by phone from Lagos, the commercial capital, on Wednesday. The move amounts to “a tactical devaluation of the local unit, without having to make the announcement,” he said.
Demand for foreign currency must go through the interbank market, Ibrahim Mu’azu, a spokesman for the central bank, said in the statement. The central bank will continue to intervene to meet legitimate demand, he said.
Weekly foreign-currency auctions “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,” Mu’azu said. “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.”
The regulator has depleted reserves to their lowest in more than three years to defend the currency. The central bank’s official target band for the currency is 159.6 to 176.4 per dollar, though it sold $401 million at 198.5 per dollar in an unscheduled auction last week to help stem the naira’s rout.
“It’s become clear in recent weeks that the run-down in foreign exchange reserves is untenable,” David Cowan, an Africa economist at Citigroup Inc., said by phone from London. “It’s good for the Nigerian foreign exchange market. A movement away from a multiple to a single exchange rate regime is better for the market and makes for a truer exchange rate.”
The Monetary Policy Committee is due to meet next on March 23 and 24, less than a week before the country holds a presidential election that was postponed from Feb. 14.
Nigeria’s foreign exchange reserves stood at $32.7 billion as of Feb. 16, down 22 percent on a year ago. Nigerian stocks have dropped 23 percent this year in dollar terms, the most among 93 primary equity indexes after Ukraine.