The Central Bank of Nigeria on Wednesday announced the immediate closure of the twin foreign exchange auction windows, in a daring move to stem the tide of increasing pressures on the national currency, the Naira.
The retail/wholesale Dutch Auction Systems, rDAS and wDAS are official trading windows for the sale of foreign exchange to end users.
The decision, according to the Director, Corporate Communications Department of the CBN, Ibrahim Mu’azu, takes immediate effect.
With the closure, the CBN ceases to sell foreign exchange, FOREX, directly to the Bureau De Changes, BDCs, who would now be required to channel all such demands to the interbank market through the Deposit Money Banks, DMBs.
Mr. Mu’azu said the closure of the rDAS/wDAS, of the foreign exchange market became necessary against the background of the exposure of the Naira to unrestrained speculative attacks in recent weeks by some illegal operators.
The wDAS window of the foreign exchange system was introduced in February 2006 to enable the CBN collect requests from authorized foreign exchange dealers interested in buying FOREX for genuine businesses.
Under the arrangement, the licensed FOREX dealers would, on behalf of BDCs and other end users of FOREX, including corporate entities and importers of goods and services, submit requests to the CBN for approval to buy foreign currencies through the auction window.
Once the dealers’ requests are approved, the dollars would accordingly be sold to the BDCs and other end users, irrespective of whether the request submitted by the authorised dealers matched the total request by its end users or not.
The RDAS window operations, on the other hand, was based solely on actual demand of FOREX by the end users, an arrangement that allowed the authorised dealers to request for only FOREX based on the actual application received from its end users.
While the two windows helped to satisfy the foreign exchange needs of most businesses, the CBN said its monitoring and regulatory activities in recent times had revealed massive abuses by some operators engaged in illegal speculative trading in the FOREX market.
The CBN had adopted these systems following the liberalization of the foreign exchange market to ensure exchange rate stability in line with its mandate.
However, in recent times, the CBN Governor, Godwin Emefiele, said only BDCs and banks with genuine demands, would be allocated foreign exchange.
At the peak of the dwindling global crude oil prices, the CBN had intervened November 2014 by devaluing the national currency by eight per cent, from N155 to N168.
On Monday, the CBN hinted that it may be compelled to exercise its regulatory authority against erring operators engaging in illegal speculative activities, to save the Naira, which slumped to all time low level, selling at about N213 to the dollar at the BDCs segment of the official market.
In its statement announcing the closure of the two windows, the CBN said it observed the widening margin in both segments of the market had engendered undesirable practices such as round-tripping, speculative demand, rent-seeking, spurious demand and inefficient use of foreign exchange resources by economic agents.
This, the Bank noted, had continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sectors of the economy and the general public.
It said it had observed a widening margin between the rates in the interbank and the rDAS window following the sharp decline in global oil prices and the resultant drop in the country’s foreign exchange earnings.
The widening gap, the Bank noted, had engendered illegal practices, including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.
“This has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public,” Mr. Mu’azu said.
To check the activities of these illegal elements, and close the gap, the CBN spokesperson said it became imperative that appropriate actions be taken to avert the emergence of a multiple exchange rate regime and preserve the country’s foreign exchange reserves.
CBN directed that all demands for foreign exchange should henceforth be channeled to the interbank foreign exchange market, adding that it remained committed to continuing its intervention in the market to meet genuine/legitimate demands.