Last year, the Central Bank of Nigeria (CBN) churned out many policies geared at stabilising the naira, which, even up till this year looked untameable.
But judging from the increasing strengthening of the local currency, the central bank appears to have more than succeeded in its job of ensuring a stable currency investors can plan with.
The apex bank first showed signs that it was disturbed when it became clear that the old corridor of plus or minus three per cent of N150 to the dollar was no longer attainable. It was however moved to a maximum of N160 to give investors an encouraging band to plan with.
But as it were, the central bank has apparently surpassed its goal of ensuring price stability to the extent of narrowing the gap between the inter-bank or parallel markets and the official market. This has consequently reduced the lure for speculators.
During the last CBN Monetary Policy Committee (MPC) meeting, it expressed worry that the foreign exchange reserves had amounted to $32.64 billion as at the end of December 2011, more or less flat relative to the $32.34 billion as at the end of December 2010, despite the higher oil price in 2011.
Notwithstanding the high prices of Nigeria’s reference crude oil (Bonny Light) which averaged $106.32 per barrel for the year, there has been little or no accretion to external reserves which was due to the high demand for foreign exchange in the market.
The committee noted that pressure on the exchange rate emanating from the high demand reflected the import-dependent nature of the economy, probably compounded by the activities of speculators.
But then, lately, the reduction in arbitrage opportunities in the oil marketing sectors combined with stronger controls in foreign exchange practices led to a mild moderation in foreign exchange net demand.
The official Wholesale Dutch Auction System (WDAS) rate (inclusive of one per cent commission) moved up from N151.62 per dollar in January 2011 to N154.45/$ in June and further to N158.21/US$1 in December 2011. The volatility in the official rates, however, was limited by the coefficient of variation being 1.28 per cent for the year as a whole compared to 0.32 per cent in 2010.
The committee had urged the CBN to strive to eliminate speculative demand for foreign exchange. The Committee also noted that as at January 24, 2012, the exchange rate was N158.57/$, while the foreign exchange reserves amounted to $34.18 billion on January 27, 2012, which could finance over six months of imports of goods and services. The outlook for oil prices in the short-term as well as the forecast demand/supply balance, suggested that the current exchange rate band should be retained while still achieving moderate continuous accretion to reserves.
Since then, the nation’s foreign reserves have continued to rise, though hesitantly. For instance, Nigeria’s foreign exchange reserves rose to $34.93 billion as at February 16 this year from $34.67 billion on February 1, the highest level in more than four and a half months, raising hopes of a more stable exchange rate of the naira.
The figure had risen from $32.98 billion at the start of January, which was also higher than the $33.16 billion a year ago.
The reserves, at their current level, could finance more than six months of imports of goods and services, CBN said.
In a bid to boost reserves, CBN, had in the past called on businesses in the country to ensure that their activities and operations were geared towards generating foreign exchange, which they will in turn, use for their import needs.
According to it, the rising demand for foreign exchange would be curtailed if businesses were concerned about generating foreign exchange for the country and for their own use.
The CBN promised to continually ensure that it churns out policies that would lead to increased foreign exchange.
Thus, the naira has continuously firmed, a confirmation that central bank policies and advice to businesses are beginning to impact on the foreign exchange market.
At the inception of this week, the naira firmed marginally against the U.S dollar on the interbank on Monday, spurred by dollar sales by a unit of Royal Dutch Shell and declining demand for foreign exchange at the official window.
Somehow, the oil firms have decided to be part of the local foreign exchange (forex) market by selling dollars to the banks directly, thus reducing the pressure on the official market, thus the foreign exchange reserves.
The naira on Monday closed at N157.60 to the dollar on the interbank market, stronger than the N157.65 it closed on Friday.
Traders said the market reacted to the dollar inflows from Shell petroleum and signs of declining demand at the official window where the central bank sold fewer dollars than it initially offered for the third consecutive time in a row.
The central bank sold $138.70 million at N155.90 to the dollar, compared with $113.53 million sold at N155.90 to the dollar at the last auction on Wednesday. The regulator had initially offered $150 million at the bi-weekly forex auction.
Traders said more importers now buy dollars at the interbank because of the improved liquidity in the market and short turn-around time for transactions.
"We hope to see the naira appreciating further after the confirmation of the winning bids for the Shell petroleum dollar," one dealer said.
Dealers also said more oil multinationals were expected to sell dollars in the coming days as part of the monthly cyclical sales to obtain naira for their local obligations.
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