The Central Bank of Nigeria (CBN) has announced the commencement of a retail dollar auction to address the growing unmet foreign exchange (forex) demand.
This move comes as the naira continues to experience a significant downward spiral, closing at N1,601 per US dollar on Tuesday.
The CBN, in a circular to authorized dealer banks, outlined its decision to deviate from the usual wholesale auctions and instead, focus on retail auctions to directly serve end-users.
This measure is expected to provide immediate relief to the forex market and halt the naira’s rapid depreciation.
Over the past year, the naira has seen a 70 percent decline in value, driven by various economic pressures including FX instability and a weaker naira.
Despite increased interventions in the forex market, including the sale of $369 million in July while purchasing less than $20 million from deposit money banks, the desired stabilization has remained elusive.
Sources within the financial sector indicate that the CBN’s change in strategy is an effort to meet burgeoning forex demand more effectively and to stabilize the currency.
Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, explained that the retail auction system is a revival of a previously utilized approach designed to ensure that legitimate forex transactions are met.
“The CBN has been trying to reduce activities on the forex window,” Olubunmi noted, “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 CBN’s decision to hold retail dollar auctions comes in response to the “growing unmet foreign exchange demand,” which has exacerbated pressure on the naira’s exchange rate.
This is coupled with seasonal demand from summer tourists and importers, which has further strained the currency.
In addition to the retail dollar auction, the CBN is also taking steps to mop up excess naira liquidity from the market. Some traders suggest that this move could help reduce the pressure on the naira by limiting the amount of local currency in circulation.
Olubunmi emphasized the importance of these measures, noting that high demand for dollars has prompted the CBN to take multiple steps, including selling dollars to Bureau De Change (BDC) operators to alleviate pressure on the naira. He stated that this step is crucial to prevent further devaluation of the naira.
The CBN’s retail dollar auction is expected to provide a more targeted approach to meeting forex demand, supporting the naira, and stemming its devaluation.
By reintroducing the retail Dutch auction, the CBN aims to stabilize the naira and ensure that forex transactions are conducted efficiently and transparently.
