Nigeria act to stabilize currency with forex auction

• In order to meet increasing demand for U.S. dollars and ease exchange rate pressure, Nigeria’s central bank has revived the Dutch Auction System.

• The goal of reintroducing the Retail Dutch Auction System is to stabilize Nigeria’s foreign exchange market while reducing disparities between official and parallel rates.

• The move by the Central Bank to sell US dollars through auctions is an attempt at strengthening the Naira which reflects its effort towards addressing challenges in the foreign exchange market.

Nigerian Central Bank Revives Forex Auction

Significant changes have occurred in Nigeria’s foreign exchange market over time. To address naira depreciation and stabilize foreign exchange markets, the Central Bank of Nigeria (CBN) has brought back the Retail Dutch Auction System (RDAS). This comes after high demand for US dollars caused a record low value of naira in July.

Impact Of Previous Forex Systems

Various systems have been used by Nigeria over years to manage its foreign currency environment . Between 2002 -and 2015, the country operated under three different systems known as RDAS, the Wholesale Dutch Auction System(WDAS), and the Interbank Rate System(IRS). 

These were meant to enhance transparency and liquidity within these markets where customer-based auctions held twice weekly were adopted under RDAS while banks could buy forex on behalf of customers using their accounts according to WDAS rules but still deeper officially recognized FX markets faced many challenges.

Introduction Of New Forex Measures

Due to such difficulties encountered before, CBN launched new strategies from 2016 until 2022. The Investors’ And Exporters’ Foreign Exchange Window together with Naira-settled OTC FX Futures was initiated aimed at improving liquidity and transparency within these markets to attract more FDIs into the country besides creating efficient ERS. However, despite these reforms, USD demand kept increasing hence contributing towards further devaluation of Naira.

CBNs decision to bring back RDAS represents serious efforts that can be made concerning current issues surrounding the FX Market. The system will enable CBN to hold twice-a-week auctions for USDs in response to the growing need for dollars among investors. Also, it will disburse $10K every week to BDC operators thereby easing liquidity problems.

In this regard, auctioning was introduced to balance dollar shortage’s effect on exchange rates thereby reducing differences between official and parallel market rates. Against all odds, this system may not fully restore stability unless further economic reforms are instituted since it can only provide short-term relief measures at best