VENTURES AFRICA – A special report by Reuters news agency has revealed an ongoing tug of war between Nigeria’s Central Bank and the Financial Markets Dealers Association (FMDA), a grouping of 40 banks, discount houses and brokerages. The battle is caused by the downward spiral of the Naira, about which both bodies disagree over pricing.
Cropley stated that among the decisions reached by the FMDA was an unofficial ‘circuit-break’ agreement to halt trade if the naira fell more than 2 percent in a day. He quoted FMDA’s chief executive, Wale Abe, as stating that no central bank officials were present at Wednesday’s meeting even though he described the move as an “entirely voluntary measure to curb volatility, in line with the body’s support for financial market stability and maturity.”
However, Cropley writes that the impromptu trading interruption runs counter to the objective of stability and maturity. He adds that ad hoc decisions from a collective of rival banks raise questions about transparency, and states that some analysts suspect hidden central bank regulation. “This is extraordinary, especially when you’re trying to encourage an independent market where market forces determine the rate and you don’t have regulators casting a heavy hand,” he quoted a South Africa-based currency strategist, who asked not to be named. “They’re basically setting limits on where the interbank market can trade,” the strategist added. “It’s very informal and that’s the problem. You can’t begin to understand the market if you’re not sure what the underlying policy is.”The central bank declined to comment.
Because Nigeria’s foreign exchange is 95 percent dependent on oil export earnings, the collapse of global oil prices has caused the naira to fall by almost 30 percent in the last year. The Central Bank efforts to defend the currency has seen it spend over $8 billion, or $28 million a day, but the pressure has remained. In November last year, the apex bank devalued the Naira by 8 percent and also hiked its interest rate by a 100 basis point to a record 13 percent, all these with little success in stemming the downward spiral of the local currency. It was at the point that the CBN declared a war on speculation, with one of its weapons being to force commercial banks to close off their currency positions at the end of a trading day, rather than maintain an overnight stance on either the naira or dollar.
According to Reuters, the apex bank relaxed that ban an inch last week but the market remains very illiquid, to the concern of outside investors such as JP Morgan, which threatened this month to eject Nigeria from its influential Emerging Markets Bond Index as a result. Cropley writes that FMDA’s new-found clout is also unlikely to convince outsiders about the central bank’s control of the currency or the market, especially as last week was not the first time its members have brought trading to a halt for an hour or more.”It sends a strong signal to the central bank,” he quotes Angus Downie, head of research at pan-African lender Ecobank. “It’s quiet a drastic step to take and it raises the debate on the value of the naira, with dealers stepping out to say ‘We won’t trade.'”
However, Cropley says FMDA chief executive Abe has insisted that there was no tension with the central bank, which enjoys ‘observer status’ at his organisation. “At the end of the day, what is important is the goals are the same: to have a market that is transparent, that is open and which can compare with developed or mature markets, or emerging markets,” he told Reuters. In a nod to investors, he also said the group had decided to make their collective decisions clear from now on, even if the deliberations of their meetings remained unreported.