The Nigerian naira struck a new record low of 164.85 to the dollar in the interbank market on Thursday, pressured for a second day by the central bank's comments earlier this week that it would not support the currency at all costs.
After the market close, however, the bank took an alternative step to help protect the local currency, saying in a letter made publicly available that it would no longer allow oil companies to buy dollars at its auctions for buying oil product imports. Those companies should use the foreign exchange they earn from exporting crude oil, it said.
The ban applies to oil companies that have SWAP agreements with the state oil company, where they agree to market and export Nigeria's crude oil, in return for delivering fuel, like petrol and diesel, which is imported from other countries.
The decision is expected to reduce dollar demand at the central bank's bi-weekly auctions and support the naira.
The move will reduce drastically demand at the official window and consequently help the naira appreciate. This could also be reflected in the interbank market as well, one foreign exchange trader said.
What the oil companies do is to buy dollars at a cheaper rate at the auction and sell their export proceeds to banks or in the parallel market. It's good for the country in the long run because most of the oil firms are arbitraging on the naira currency, he added.
The naira weakened to 164.85 to the dollar, a new record low, at one point on Thursday, from 161.70 at the close on Wednesday. It remained under pressure after central bank Governor Lamido Sanusi said on Wednesday the naira could depreciate if oil prices and foreign exchange reserves continue to fall and attempts at monetary intervention are exhausted.
Last week the bank breached its policy and allowed the naira to trade outside the weakest limit of its target band but said it had not yet decided on whether to change the +/- 3 percent target band around 150 to the dollar.
Traders said the central bank's failure to fill all demand for forex at a bi-weekly auction on Wednesday, as well as its breach of the target band and its comment on the outlook for the currency have eroded confidence in the market.
Many importers are now bringing forward their obligations in the face of the recent position of the authority on the naira's valuation, one dealer said.
We have seen the forex reserves going down at a time when the oil price was above the 2011 budget benchmark, and the fact that next year's budget is being premised on (an exchange rate of) 153 (to the dollar) -- all these are indications that the government is no longer willing to defend the naira at the present level.
The exchange rate of 153 to the dollar assumed in the 2012 budget is weaker than the 150 per dollar rate on which Nigeria's 2011 budget is based.
The IMF said earlier this year that the naira was over-valued and that a more flexible approach to currency control would cushion external shocks to sub-Saharan Africa's second-largest economy.