The Central Bank of Nigeria (CBN) has announced plans to introduce a Retail Dutch Auction System (DAS) next Wednesday to tackle the mounting unmet foreign exchange (FX) demand from end users.
According to a circular issued by the apex bank, this initiative aims to alleviate the growing pressure in the FX market and stabilize the naira’s exchange rate, which closed at N1,617.08/$1 on Friday amidst severe demand pressure.
Thus, the CBN has directed all authorized dealer banks to submit a detailed and legitimate list of outstanding FX demands from their end users.
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The circular states: “The CBN has noted growing unmet FX demand from end users with banks. This has continued to increase the demand pressure in the FX market with adverse impact on the exchange rate of the naira. Authorized dealer banks, therefore, are to provide to the CBN a legitimate list of all outstanding FX demand by end users.”
The comprehensive list must include customer details such as name, address, contact information, Bank Verification Number (BVN), account number, Tax Identification Number (TIN), transaction type, Form A or Form M, and Letter of Credit (LC) Number. Authorized dealers must submit this information via email to [email protected] by Tuesday, August 6, 2024, using the provided template.
Additionally, accounts of prospective customers must be naira-backed to qualify for participation in the auction, ensuring immediate settlement upon confirmation of bid acceptance by the CBN.
The Retail Dutch Auction System (DAS) will be conducted by the CBN on Wednesday, August 7, 2024, to mitigate the demand for eligible transactions through authorized dealers. This approach is designed to stabilize the FX market and support the naira.
What You Should Know About DAS
The DAS is a direct sale of Forex by the CBN through the banks to the end users of the forex. Under this system, an auctioneer (CBN) starts with a very high price, incrementally lowering the price until someone places a bid.
It is based solely on the actual demand for forex by the end users. As such, the authorized dealers will only bid for forex based on the number of actual requests they have received from their end users. This means, that if an authorized dealer has received only $50,000 requests from its end users, it can only bid for that $50,000 from the CBN auction.
This approach, which is expected to eliminate speculation, is being deployed by the CBN against the backdrop of failures of its previous initiatives to address the FX crisis.
For instance, in July, Nigeria’s central bank sold at least $377.17 million to authorized FX dealers. Aside from the FX sales to authorized dealers, the CBN announced the approval of the sales of FX to eligible BDCs to meet the demand for invisible transactions in a decisive step to strengthen the naira on Thursday, July 18, 2024. The bank announced that the sum of $20,000 is to be sold to each BDC at the rate of N1,450/$1.
DAS has been touted by experts as a viable solution to Nigeria’s FX crisis, especially in the absence of adequate liquidity. They argue that the willing buyer and willing seller mechanism is not the best for price discovery.
Amidst Nigerians’ demand for the full restoration of fuel subsidies, following ongoing protests against bad governance across the country, experts believe the naira depreciation is a more serious challenge than the cost of petrol.
“The big elephant in the room is the exchange rate, not fuel subsidy. If the exchange rate had remained in the N800 corridor, inflationary pressures wouldn’t have been so high. The exchange rate is tied to productivity and the ability to mobilize foreign capital. We can’t borrow our way out of this,” Seun Onigbinde, founder of BudgIT, stated.
DAS is expected to lower the price of dollar in the official market and reduce prices in the parallel market.