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Some finance experts have said that the Central Bank’s decision
to hike the Monetary Policy Rate may be a positive signal for exchange rate
stability, even as the naira continues its gradual decline in value.

The naira fell to a 13-month low of 155.20 to the dollar on
Monday, from 154.35 on Friday at the interbank market, as demand surged to a
new year-high at the official bi-weekly auction, a Reuters report said on
Monday.

The Central Bank sold $650 million at 150.05 a dollar at
Monday’s auction, short of $741 million demanded. The CBN had sold $400 million
at 149.89 per dollar at last Wednesday’s forex auction.

“Many importers have resorted to panic buying of dollars and are
bringing forward their obligations because of fear the naira could depreciate
further,” the report said, adding that dealers say the market had become tight
due to lack of dollar inflows from energy companies as anticipated last week.

The report further said that the bank had raised supply from its
usual $400 million to $650 million at its bi-weekly auction on Monday, with the
hope of clearing the backlog of demand, only to be faced with a fresh increase
in corporate demand, which further weakened the local currency, with traders
saying the naira could depreciate further in the week if strong dollar demand
persisted and the Central Bank was not able to provide support.

Positive signal

Samir Gadio, emerging markets strategist, Standard Chartered
Bank, said the weak naira confidence has been the result of substantially low
interest rates.

“We see this development as a positive signal in terms of
exchange rate stability,” Mr. Gadio said.

“Weak naira confidence has been the result of substantially low
interest rates. By raising real interest rates, the Central Bank is sending a
signal to the market that it will rely on the exchange rate as the nominal
policy anchor and will be keen on preserving the USD/NGN150 level, despite some
recent cyclical, rather than structural, currency weakness.

“Nevertheless, we think the main risk to the foreign exchange
outlook is the government’s loose fiscal stance. In other words, if the next
administration pursues the current countercyclical fiscal policies after the
2011 elections, there could be an incentive to devalue the exchange rate and
boost the marginal utility of every dollar of oil revenue in naira terms,” Mr.
Gadio said.

Last week, the Central Bank of Nigeria (CBN)’s Monetary Policy
Committee decided to hike the MPR by 6.25 percent and increase the standing
deposit facility to 3.25 percent, from 1 percent, in contrast with market
expectations.

The committee also noted that the Whole Dutch Action System
(WDAS), interbank and Bureau de change (BDC) segments of the foreign exchange
market all witnessed “mild” naira exchange rate depreciation, but stated that
it believes that the relative stability in the foreign exchange market was
likely to be sustained in the near term.