Currency hoarders embark on panic selling on new fx rules, CBN floods market with $500 m

Currency hoarders and speculators reacted to tacit devaluation of the naira which was followed by release of $500 million into the market by the Central Bank of Nigeria, (CBN).
This was a result of exaggerated effect of the policy which they felt could lead to immediate demise of the naira.
Metrobusinessnews.com findings at Allen and Apapa axis of Lagos state where black market mostly operate show that speculators are bringing out their dollars for sale due to fear of losing money.
Consequently, the naira appreciated by N17.00k to close at N503 per dollar representing gains of 3.2 percent compared to N520/$ it closed the previous day at the parallel market.
The CBN announced a $500 m intervention in the FX market using Non-Deliverable Forward (NDF) contracts and stepped up dollar sales on the interbank currency market on today, just as it also began providing direct additional funding to banks to meet the FX needs of Nigerians for Personal and Business Travel, Medical needs, and School fees.
The $500 m sale was in the form of a Special Wholesale Intervention Forward not exceeding 60 days, according to a circular to all authorised dealers dated February 21, 2017, seen by Business day.
Authorised dealers were to send their requests not exceeding 7.5 percent of the amount on offer, while banks shall not exceed their net trading position limits when bidding for the offer.
“While the plan to sell $500million in the interbank market may boost dollar liquidity, it does not completely hedge the participants from the imminent Foreign Exchange risk. Except the CBN gives priority to supply dollars to the forward contract participants, the naira will remain pressured, thus contradicting CBN’s objective to close the gap between the official exchange rate and the parallel market,” said Ayodeji Ebo, Acting Managing Director, Afrinvest Securities Limited.
Kunle Ezun, Treasurer at Ecobank said in a note, “While there was no change to exchange rate policy, the new circular in effect will likely support naira appreciation at the parallel market given the expected rise in FX liquidity that will be available to clear all the unfilled orders in the interbank FX market and other invisible transactions.”
At the money market, the overnight inter-bank rates, which is the rate at which banks lend to each other rose to 132.00 percent, higher than 21.14 percent the previous day.
The CBN in a bid to put a lid on abuse of the system put out some stringent measures for the $500 m forwards sale, including banks not being allowed to allocate funds for customers letters of credit (LCs) that have already benefited from past sales, banks not multiple bids, and successful banks account being debited immediately after the release of the intervention result at their quoted rates.
The CBN will also send examiners to the banks immediately after the intervention and any that fails to comply with the rules and other FOREX guidelines sanctioned.
“We are hopeful the CBN will improve overall dollar supply in the coming weeks as well as clear pent up dollar demand to boost confidence and liquidity. In addition, the CBN should embraced the fully implementation of the proposed managed float FX regime policy,” Ayodeji Ebo of Afrinvest said.