The Central Bank of Nigeria (CBN) yesterday announced that it was going to sell US dollars at auctions and directly to the market. At the same time, it announced a raise in the amount of dollars that banks can hold in their reserve. This is in an effort to stabilise the Naira.
The regulator said it would raise the foreign exchange net open position limit banks can hold to 3% from 1% of shareholders' funds from Monday, less than two weeks after slashing these limits to help protect the Naira.
Net open position is the amount of dollars banks can hold relative to shareholders' funds. The CBN lowered it to 1 percent from 5 percent on October 10 to free up dollar supply to the interbank market but traders complained the market was almost brought to a halt by the decision.
The move had curbed lenders ability to hold dollar reserves to meet customer needs, leading to volatile trading at the forex market. Some analysts said position limits at 1 percent could have negatively weighed on banks' revenues.
CBN also said it will sell dollars directly into the interbank market and continue providing dollars at its official auctions. It provides dollar liquidity to meet high demand and help support the Naira.
"In the continuing effort to sustain stability in the foreign exchange market, the CBN shall from time to time intervene in the interbank market. This is in addition to (auctions)," the apex bank said in a letter to banks.
Our currency hit an all-time low against the dollar prior to an emergency CBN meeting last week as worsening global economic conditions curbed risk appetite and dollar demand from importers and speculators increased.
The Naira has been volatile this week. It was trading at 159.30 to the dollar in the interbank market on Friday, weaker than 154.60 on Thursday but firmer than last week's record low of 167.80.
CBN raised interest rates by 2.75% to 12% and implemented several other tightening measures to help protect the local currency at its emergency meeting on Oct. 10.
It has also been selling dollars at auction and directly into the market. It offered to sell $200 million to some lenders in a special foreign exchange intervention on Tuesday but later retracted the sale.
Dealers said the regulator sold $103.28 million at a cut-off rate of 150 naira to the dollar at an intervention on Thursday, helping to provide some liquidity in the market, which helped the naira to recover.
Traders said the central bank's latest interventions could help narrow the wide margin between official and interbank trading rates and reduce the volatility in the market.-DAILY TIMES
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