Nigeria Content Online

The Central Bank
sold a total of $1.61 billion dollars at the official bi-weekly
Wholesale Dutch Auction System (WDAS) during the month of July.

By this figure, the
CBN met 90 percent of the $1.79 billion demanded, which is 37.8 percent
lower than the $2.6 billion sold for the month of June at the auction,
out of $2.75 billion demanded by traders. This is indicative of a
decline in demand for foreign exchange, even as the Central Bank has
promised to meet legitimate demand.

Already, for
August, $1.1 billion have been sold, which represents 80.2 percent of
the $1.37 billion demanded in the auctions held so far, while there are
three more auctions before the end of the month.

The decline in
forex demand and sales comes at a time when the country is making
efforts to shore up its foreign reserves. From a record $62.24 billion
in Nigeria’s foreign reserves in mid-May 2008, it dropped to $36
billion on July 6 this year, its lowest level in over two years. The
figures climbed to $38 billion on Tuesday.

Nigeria’s foreign
reserves is capable of financing 17 months of imports, above the
internationally recommended threshold of three months.

Sale by oil majors

A financial market
analyst, who spoke off record, said the decline in forex demand does
not come as a surprise, even as he hinted that the increased sale by
foreign oil companies could account for the reduced demand at the
official window.

The Central Bank
allows banks to source for foreign exchange from other sources, which
must however, be adequately reported. He said forex demand was directly
linked to import level, which has also reduced during the period.

“The real issue is
that since the end of 2008, foreign portfolio investment and diaspora
investment have reduced in Nigeria. NNPC (Nigeria National Petroleum
Corporation) and oil majors have been selling more than usual and
people have been buying cheaper than from the Central Bank.”

He said the current forex demand was the normal cycle, adding that by the last quarter, the level would improve.

Doyin Salami, a
member of the Monetary Policy Committee of the CBN, said the government
has to make a choice whether to defend the value of the naira, in which
case, it could commit huge sums from the reserves to meet demand; or
could decide to devalue the naira in order to reduce pressure on funds.

“Should I defend
the naira or should I defend the exchange rate? That is the question
for the Central Bank to answer. Whatever happens is going to have
effect on inflation,” he said.

The naira currently
sells at N148.75 at the official window and above N150 at the interbank
market. At the beginning of July, the naira exchanged for N148.5 to the
dollar at the official window.

Reduced instability

Analysts at FSDH
Securities Limited, however, observe that market risk has reduced and
the perceived instability in the local financial system has stabilised.
In its forecast for the second half of the year, it observed that the
ability of the CBN to meet genuine foreign exchange demand in its
weekly auction sales has helped sustain the premium at low level
throughout the period.

“It is expected that the eventual implementation of the budget 2010
will provide enabling macroeconomic environment that will help Nigeria
withstand the challenges posed to it by the global economic and
financial meltdown.”