CBN Intervenes to Support Naira with Retail Dollar Auction

CBN Intervenes to Stabilize Naira with Retail Dollar Auction

The Central Bank of Nigeria (CBN) is attempting to halt the naira’s rapid decline by selling dollars through a retail auction. Today, the CBN has shifted from its typical wholesale auctions to banks, requesting authorized dealer banks to provide a comprehensive list of all outstanding foreign exchange (FX) demand from end users.

Despite the CBN’s increased interventions in the foreign exchange market, the naira’s precipitous fall has baffled the apex bank. According to data from FMDQ, the CBN sold $369 million in July, while purchasing less than $20 million from deposit money banks. These efforts have not yielded the desired stabilization for the naira, prompting the CBN to adopt a retail auction strategy.

Last month, the naira dropped below N1,600 for the first time, reaching a record low. On Tuesday, it closed at N1,601 per US dollar, marking a 70 percent decline over the past year. In addition to the retail auction, the bank aims to absorb excess naira liquidity, according to traders.

Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, explained that the CBN’s change in strategy is aimed at meeting the surging demand for foreign exchange and stabilizing the currency. He noted that this approach revives a previously used system designed to ensure legitimate forex transactions are fulfilled.

“The CBN has been trying to reduce activities on the forex window,” Olubunmi said, “but the reality is that the CBN will actually be the main supplier. They are creating this particular window to ensure that the naira stabilizes.”

The high demand for dollars has prompted the CBN to implement multiple measures, including selling dollars to Bureau De Change (BDC) operators to alleviate pressure on the naira. This step is crucial to prevent further devaluation of the currency.

“The reality is that the CBN will still be the main supplier of forex,” Olubunmi reiterated. “Reintroducing the retail Dutch auction will support the naira and stem devaluation.”

A circular issued by the CBN stated that the upcoming sale is in response to the “growing unmet foreign exchange demand,” which has exacerbated pressure on the naira’s exchange rate. Additionally, the naira faces significant pressure due to seasonal demand from summer tourists and importers.

By stepping in with this retail dollar auction, the CBN aims to address these challenges, provide relief to the FX market, and ultimately stabilize the naira, ensuring that legitimate forex demands are met and curbing the currency’s further devaluation.