Nigeria limits currency trading to halt fall of naira

Nigeria’s central bank ordered banks to stop trading foreign currencies purchased at its auctions in a bid to stop a further weakening of the local currency as increasing political risk sparks a rush for the dollar.

Funds bought at the twice-a-week auctions are no longer “transferable” on the interbank market, the Abuja-based Central Bank of Nigeria said today in a statement on its Web site dated Aug. 3. Neither can the currency be sold to other outlets such as foreign-exchange bureaus and hotels, it said.

It followed the re-selling by lenders on the interbank market at a premium funds they had purchased at a cheaper rate from the central bank, the statement said. The naira has fallen 4.8 percent against the dollar since July 13.

The aim of the central bank is to “keep the exchange rate within check,” said Abdulhakeem Muhammed, a currency trader at the local unit of Citibank in the commercial capital, Lagos. “This will only hold for as long as they can keep their supply at close to the aggregate demand” at the auctions, he added.

The central bank yesterday boosted its sales of foreign currency to commercial banks, offering $600 million at an auction, Citibank said. The naira gained 0.8 percent to 155.43 naira to the dollar yesterday.

Last week, the bank sold only $400 million of foreign exchange, compared with the $1 billion demanded by local banks, Citibank said in an e-mailed note yesterday. The limited dollar sale pushed the naira to a 15-year low against the dollar on July 31.

Foreign Reserves

The west African country may be guarding against further depleting its foreign reserves which stood at $43.2 billion on July 30, compared with $53 billion at the end of December.

The naira has lost almost a quarter of its value since the end of November 2008, when the global financial crisis triggered a slump in the price of oil, which accounts for about 90 percent of Nigeria’s export revenue.

Africa’s most populous country, is vying with Angola to be the continent’s top oil producer. It lost the position as a result of attacks by militants in the oil-producing Niger Delta area, which have cut more than 20 percent of its crude exports since 2006.

The currency depreciation also reflects “recent rises in political risk,” Richard Segal, an analyst at London-based fund manager UBA Capital Ltd., said in an e-mailed note. Demand for dollars will normalize “if and when these political issues are resolved,” he said.

Violence claimed about 700 people in northern Nigeria last week in clashes between security forces and an Islamic sect that opposes Western-style education, the Associated Press reported on Aug. 2.

The fighting broke out about a month after President Umaru Yar’Adua announced a pardon for the militants in the Niger Delta in a bid to end their crippling attacks on oil facilities.

Source: Bloomberg

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