Nigeria’s Dollar Supply Beats Demand As Naira Slumps

The Central Bank of Nigeria (CBN) sold $360 million to lenders at an auction where supply exceeded demand for the first time in eight sessions as the currency of Africa’s biggest oil producer traded near a six-month low to the dollar.

Banks bidding for foreign exchange bought at a marginal rate of 148.87 naira per dollar at last week’s auction, the Central Bank of Nigeria said on its website last week. The marginal rate is the last successful bid at which dollars were sold. The highest successful bid was 149.15 naira per dollar, while the lowest was 148.87, it said.

The naira snapped five days of gains, weakening as much as 0.2 percent to 151.9 to the dollar, near a six-month low of 152.335 reached on May 18. It traded 0.1 percent down at 151.8 as of 3:08 p.m. in the commercial capital, Lagos.

“The fall of the naira is the combined effect of excess liquidity, low interest rates and fall in oil prices,” said Ayo Teriba, chief executive officer of Economic Associates, a Lagos- based research company.  Nigerian banks are awash with funds, he said, after they cut back on lending following a debt crisis last year that left them with toxic assets estimated to be worth $10 billion by Eurasia Group, a New York-based research company. The price of oil has declined 14 percent this year.

With bank deposit rates “low and unattractive” and the stock market still struggling to recover lost ground, many investors are going for hard currencies, which they consider safer, said Teriba. The Nigerian Stock Exchange All Share Index has gained 25 percent this year, paring an 80 percent slump from 2007 to the end of last year. The rate on three-month bank deposits is 7.51 percent now compared with 12.37 percent in January, according to the central bank’s website.

Nigeria, which depends on oil exports for more than 95 percent of foreign-exchange income according to the Finance Ministry, experienced a decline in foreign income as oil prices took a tumble with the drop in energy demand following the global financial crisis in 2008. Oil is trading 53 percent below its high of $145.29 reached in July 2008.

Nigeria’s foreign reserves, the source of funding for the central bank’s twice-weekly auction, dropped to $39.8 billion as at May 21, the latest figure on the Central Bank of Nigeria’s website.