Nigeria banned banks on Friday from reselling dollars bought at a currency auction to other banks, dealers said, a move aimed at curbing speculation in the beleaguered naira currency. Central bank spokesman Ibrahim Muazu confirmed the bank sold dollars in a special intervention on Friday and said it will continue such sales on a "need basis" to satisfy demand in the interbank market and curb speculative attacks, which he blamed for the naira's weakness.
Muazu said the bank was not planning to devalue the currency again after last November's 8 percent cut, aimed at preserving foreign exchange reserves, but was studying dollar demand closely. "Our target is to stabilise the market in the interest of investors and the economy. We will do everything to ensure that we meet demand," Muazu told Reuters. "It's not likely we would raise the band on the naira any time soon. We are looking deep into the areas of demand, if speculators are not there then the situation would return to normal," he said.
The naira has crashed through the psychologically important level of 200 to the dollar this week in a rout triggered by weak oil prices and escalating tension over the postponement of a presidential election in Africa's biggest economy. The central bank has pledged to stabilise the naira and has been deploying various measures.
On Friday, trading was delayed until after 0900 GMT to allow dealers to submit demand for dollars to the central bank, the head of the Financial Markets Dealers Association (FMDA) said. The central bank then injected dollars into the market in what David Adepoju, president of the FMDA - the club of 40 banks, discount houses and brokerages that regulates the market - described as "a special forex auction".
But dealers said the central bank then banned lenders from selling dollars sourced from it. The central bank had said the move would not be a one-off, Adepoju said. "There is no longer price discovery on the naira. With the special auction you should be able to buy and sell, no matter where the market is," one dealer said. The central bank did not immediately comment. The bank chief said on Thursday there was "no need to panic" about the currency's plunge.
Although the dollar sale on Friday was meant to calm nerves, dealers said it made two-way trading inactive, undermining Nigeria's credibility as a smoothly functioning capital market, and could trigger its ejection from a J.P. Morgan emerging market bond index. In the year after Nigeria joined the index in October 2012, foreign holdings of its bonds jumped from $1.2 billion to $5.4 billion, but J.P. Morgan said last month Nigeria's inclusion was under review because of a lack of market liquidity.
Ejection from the index would trigger major capital outflows because investors who track it would have to sell Nigerian bonds. That would exacerbate a budget crunch in Abuja by removing a source of funding and further hammer the currency. Two large sales were done at 198.50 naira to the dollar, totalling $40.8 million, before market close, which dealers said was part of the central bank's intervention. It has burned through more than $110 million a day trying to defend the naira's target band.
"The successful implementation of this strategy will depend on how much of the central bank's FX reserves it is willing to use in defence of the currency," Razia Khan, head of Africa research at Standard Chartered Bank said. In the latest update, the central bank said its reserves had dropped to $33.4 billion as of February 10, a decline of $1 billion in nine trading sessions since January 28. The stock market also took a hit for the seventh straight session on Friday, falling 8.8 percent.
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