Central Bank trys to ensure foreign exchange stability

The Central Bank of Nigeria (CBN) has said the main thrust of its focus in the new year is to ensure stability in the foreign exchange market.

Lamido Sanusi, the CBN governor, said the position held in 2010 would continue.

“We remain committed to stability in the forex market. We are pleased that we had stability last year,” Mr. Sanusi said in a text message. He added that the bank has made its stance clear at the last Monetary Policy Committee (MPC) meeting held on November 23, 2010.

At the end of the meeting, the MPC expressed belief that the relative stability in the foreign exchange market is likely to be sustained in the near term.

“The committee would continue to monitor developments in the market to ensure that measures are taken to eliminate speculative demand and exchange rate volatility. The committee continued to urge greater fiscal responsibility and commitment to reforms that will enhance the effectiveness of monetary policy,” it stated in a communiqué.

The Central Bank deployed massively from the country’s foreign reserves to maintain foreign exchange stability in 2010. This led to its depletion, dropping from $42.4 billion at which it opened the year, to $32.35 billion as at December 31, 2010.

Dutch auction continues

The Central Bank also stated that it will continue to adopt the Wholesale Dutch Auction System (WDAS) in 2011.

In a circular to all authorised foreign exchange dealers last December, it informed that minimum bid amount by an authorised dealer at the bi-weekly auction shall be $500,000.

Meanwhile, the naira is expected to be under a short term pressure until the WDAS auction resumes next week. Some experts, however, say they expect the naira to correct itself once auction resumes. Central Bank carried out its last auction on December 15.

“The Central Bank carried out its last auction on December 15 and it would not be returning to the market till January 8 so what we expect is see short term pressure on the naira,” stated Renaissance Capital, an investment banking firm.

“But we would expect the currency to correct in the new year and possible inflow of dollars by the oil majors. This is a cyclical process rather than structural,” it added.

Bismarck Rewane, managing director, Financial Derivates Company, a financial advisory firm, however, said exchange rate stability would remain as the Central Bank continues to intervene the naira using interest rates as anchor.

“The naira maintained exchange rate stability throughout 2010, though it moved with the acceptable limit of three percent (plus and minus),” Mr. Rewane said.

He added that this stability was achieved at the expense of foreign reserves.

“Slight pressure on the naira would continue, though our projection is for a rate on N153-N154 per dollar by June 2011,” he said.