Nigerian central bank restricts dollar holdings

Nigerian central bank restricts dollar holdings

2014-12-18 15:43

Lagos - Nigeria's central bank has barred banks from holding their own funds in dollars in order to end speculative pressure on the ailing naira currency, the governor said on Thursday.

Godwin Emefiele told Reuters in a phone interview that he believed the current naira band, set last month, was "appropriately priced at this time", signalling a will to defend the currency, although it is currently trading below the band.

"We do not want speculators in this market any longer," he said. "The banks are not supposed to hold any funds (in dollars) of their own. They are supposed to buy and sell currency on behalf of customers."

The naira has been battered in recent months by the plunging oil price. Despite heavy intervention in the market, the central bank has failed to keep the currency in the new band it set on November 25 when it devalued the currency by 8% in a bid to halt the slide in its foreign exchange reserves.

Asked whether or not the bank would devalue again, Emefiele told Reuters: "As the need arises, action will be taken. But we believe the currency is appropriately priced at this time."

The naira fell to a record low of 188.85 to the dollar after the governor's comments, well outside the bank's target band.

In its latest effort to try and support the currency, the bank issued a circular overnight stipulating that dealers had to reduce the percentage of "shareholders funds" that they could hold in dollars from 1% to zero.

"We are seeing some elements of speculation in the market by some banks who think the level will re-adjust further, and that is not our view," Emefiele told Reuters.

On the day of the devaluation the central bank also raised interest rates by 100 basis points to 13% to support the currency. "We are maintaining a tight monetary policy," he said.

Since devaluation the bank's target band has been 5% plus or minus 168 to the dollar, but some traders doubt the devaluation went far enough given the bleak outlook for oil prices.

Despite the new restrictions imposed overnight, Emefiele said the bank wanted to reassure the market that "if there is genuine demand ... for dollars for legitimate purposes ... it will be met."

Brent crude recovered 3% to above $63 a barrel on Thursday, extending a rebound from five-year lows this week but it has nearly halved since June, posing problems for Nigeria, Africa's biggest oil producer.

Nigeria has slashed its forecast for economic growth next year owing to weak oil prices, according to the budget Finance Minister Ngozi Okonjo-Iweala presented to parliament on Wednesday.

She expected oil to average around $65 to $70 a barrel in 2015.

Oil accounts for about 15% of Nigeria's gross domestic product but provides 95% of foreign exchange and 75% to 80% of government revenues.

The weak naira will also probably fuel inflation, which has been stable in single digits for two years. The impact on inflation is expected to be felt in January, a headache for President Goodluck Jonathan who will seek a second term in elections scheduled for the following month.