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The naira has shed
114 kobo, or 0.76 per cent at the official market as the Central Bank
of Nigeria (CBN) struggles to meet increasing foreign exchange demand.
The naira opened the New Year at N149.17 to the dollar and closed
Monday at N150.31 at the official market. At the interbank, the dollar
traded for around N155 and N57 at the parallel market.

Out of a total of
$1.67 billion that was demanded in the four auctions held this year,
the CBN sold $1.15 billion, representing 69 per cent of demand. This is
coming as the regulator’s resolve that it would continue to defend the
naira by striving to meet all legitimate demand at the bi-weekly
Wholesale Dutch Auction System (WDAS) foreign exchange market.

The CBN governor,
Lamido Sanusi, confirmed recently that it will maintain its foreign
exchange objective in achieving stability. “We remain committed to
stability in the forex market. We are pleased that we had stability
last year,” Mr Sanusi said in a response to enquiry on how the CBN
intends to pursue its foreign exchange objective in 2011.

Cost of stability

However, this
stability was at the cost of depleting foreign reserves, which went
down from $42.39 billion at the beginning of 2010 to $32.35 billion at
the close of the year, though, the reserves has been trending upwards
in the last few weeks, closing last Friday at $33.53.

A currency dealer
on Broad Street, Lagos, Suleiman Ghali, hinged the depreciation of the
naira on Central Bank’s failure to substantially meet demand. “Dollar
is scarce and even allocating only $50,000 to bureau de change does not
help matters,” Mr Ghali said.

CBN recently added
the Chinese Yuan, to the list of foreign currencies that can be used
for trade settlement in the domestic foreign exchange market. This was
in a bid to reduce the pressure on the dollar since a substantial part
of Nigeria’s international trade settlement is for imports from China.

The directive has,
however, not become operational. “It is not yet implemented. Let us
wait and see how it will affect demand for dollars. You know the system
of government, sometimes, it is not what they say but what they do” Mr
Ghali said.

Increased supply

Analysts at
Afrinvest West Africa, a financial services and advisory firm, said
CBN’s pursuit of maintaining stability may result in more intervention
in the weeks ahead. “Given CBN‘s commitment to managing the exchange
rate at the $1.00 / N150.00 – N151.00 band, we expect increased supply
of the dollar to meet demand at the official market,” according to the
firm’s weekly report.

“Nigeria’s growing
and substantial trade relation with China (especially imports) is
expected to spur demand for the Yuan in the medium to long term. We
expect forex exposure to fluctuations in the US Dollar to be
significantly reduced as banks begin to issue Yuan accounts to their
customers,” the report stated.