By Chinwendu Obienyi
“We will not only focus on enhancing market transparency but we will equally promote effective price discovery, roll out strategies to improve the ease of doing business in Nigeria, consolidate and sustain the gains through an efficient and transparent market system, boost financial and economic inclusion for small businesses and households, interrogate all potential ways to leverage smarter use of technology, and remote banking to reduce the cost of transactions and expand accessibility to the financial system”.
These words have been most consistent from the start of the Central Bank of Nigeria (CBN)’s administration under the leadership of Olayemi Cardoso.
Coupled with its number of reforms in the Nigerian Autonomous Foreign Exchange Market (NAFEM) which involves the ongoing recapitalisation exercise, selling FX to Bureau De Change (BDC) operators and banks, clearing FX backlogs amongst others, the apex bank, recently made significant strides in re-enhancing price discovery and addressing the growing demand for foreign currency through its recent Retail Dutch Auction System (RDAS).
For context, the RDAS is a direct sale of FX by the Central Bank through the banks to the end users. The price at which the FX is being sold is usually determined by the highest accepted bid in the auction. Central Banks employ this to control FX liquidity and stabilize the exchange rate market by allowing market forces to influence currency allocation.
The auction, which allocated $876.26 million to 26 qualified banks at a rate of N1,495/$1, represents a strategic move by the CBN to manage the escalating pressures in the foreign exchange (FX) market and ensure a more transparent and efficient process for FX allocation.
The RDAS serves as a mechanism for the CBN to facilitate price discovery in the FX market, where commercial banks bid for foreign currency on behalf of their customers. By allowing banks to submit bids within specified exchange rate ranges, the CBN can gauge the prevailing market conditions and adjust its interventions accordingly.
The process not only helps in determining a more accurate market-driven exchange rate but also mitigates the risks associated with artificial price distortions.
Furthermore, through the RDAS, the CBN aims to meet the foreign currency needs of various sectors, particularly importers and businesses that require FX for international transactions. By allocating substantial amounts to banks with significant customer bases and high demand for FX, the CBN ensures that these critical needs are met, thereby supporting economic activities that are dependent on foreign exchange.
A total of 32 banks reportedly participated, submitting bids valued at $1.18 billion.
However, six banks were disqualified for submitting incomplete bid templates, thus leaving 26 banks to share the $876.26 million provided by the apex bank, covering approximately 75% of the total bid amount.
Zenith Bank, known for its strong corporate governance, robust financial performance and innovative banking solutions, secured $267.86 million after bids between N1,500/$1-N1,650/$1. First Bank, despite making changes in its board amid regulatory scrutiny, had a successful bid of $228.99 million in FX after bid range of between N1,500/$1-N1,600/$1 while Access Bank secured $79.09 million.
Furthermore, Fidelity Bank, growing its market share steadily, got $43.62 million from the apex bank, GTCO received a successful bid of $29.54 million in FX while Standard Chartered Bank secured over $28.43 million after bid range of between N1,500/$1-N1,600/$1.
Taj Bank, Jaiz Bank, Sterling Bank and Union Bank all secured $19.11 million, $16.71 million, $14.4 million and $13.27 million, respectively. In the days following the auction, the Naira appreciated 1.7% at the NAFEM window to end the week at N1,574.2/$1.
Similarly, the FX allocations also boosted the performance of these banks on the Nigerian Exchange Limited (NGX), driving the NGX Banking Index up by 5.1% and improving the year-to-date returns of the domestic bourse to +31.7%.
The outcome of the auction clearly underscores the effectiveness of this approach. These banks can now cater to their customers’ FX requirements more efficiently, thereby reducing the backlog of unmet FX demands and easing the liquidity pressures in the market.
According to the CBN, it took the RDAS approach after it observed growing unmet FX demand from end users with banks, which in turn, has continued to increase the demand pressure in the FX market with adverse impact of the exchange rate of the naira.
Mixed reactions
Reacting to the development, the Head of Research, FSL Securities, Victor Chiazor, noted that the allocation of FX through the RDAS is crucial for banks to meet the demands of importers, businesses and other entities that require foreign currency for international transactions.
Chiazor said, “Banks that receive higher allocations are generally those with a larger customer base or more significant demands for foreign currency.
The specifics of the allocations, including the amounts received by each bank, would typically reflect the level of demand from their customers and their ability to bid effectively in the auctions. This development highlights the ongoing importance of FX allocation in the Nigerian banking sector, particularly in managing liquidity and meeting the country’s foreign exchange needs”.
He added that the exclusion of the six banks shows that the apex bank has stuck to its efforts to maintain transparency and efficiency in the FX market. According to him, future auctions will see banks adhere to submission deadlines and complete bid templates accurately.
For their part, analysts at Afrinvest Research, stated that while the CBN’s efforts to stabilize the FX market are commendable, the current approach may only offer temporary relief.
They noted that if the CBN continues to meet the substantial demand at FX auctions—where the magnitude of bids has reached $1.2 billion weekly—the reserves could be depleted within 6 to 9 months, assuming the inflows do not adequately offset the outflows.
According to them, “For the naira to regain and sustain its strength, the implementation of strategic fiscal policies aimed at enhancing economic productivity is crucial. This includes increasing oil production to at least 1.80 million barrels per day (mbpd), channeling higher remittance flows through official channels to at least $20.0 billion per annum, and attracting longer-term foreign direct investment (FDI) of at least $10.0 billion annually. Without these critical economic improvements, the naira is likely to continue lagging behind the FG’s ambitious target.
Thus, a lasting stability will require a more comprehensive strategy focused on boosting economic productivity and addressing the structural challenges facing Nigeria’s economy”.
Under the leadership of Governor Olayemi Cardoso, the CBN’s renewed focus on transparency and efficiency in the FX market is evident. The exclusion of six banks from the auction due to incomplete bid submissions highlights the apex bank’s commitment to maintaining strict adherence to auction guidelines, thereby fostering a fair and competitive bidding environment.
CBN’s use of the RDAS is a pivotal tool in its broader strategy to stabilize the naira, enhance price discovery, and ensure that foreign currency demands are met in a timely and efficient manner. However, as the CBN continues to refine this process, it is expected that the FX market will experience greater stability, contributing to overall economic resilience.
