Nigeria's interbank foreign exchange market has effectively shut down, dealers said on Wednesday, as dollar supply dwindles and it waits to see if the central bank will allow the local currency to fall further.
The Nigerian naira <NGN=> weakened sharply to almost 130 to the U.S. dollar on Tuesday from 120 as dealers digested the impact of a budget statement by the president and reacted to a managed depreciation of the local currency.
Banks said no spreads were being quoted on Wednesday as the market waited for clarity on the central bank's foreign exchange policy and as dollar supply all but dried up.
The central bank allowed the naira, broadly stable against the dollar for months, to depreciate further at its bi-weekly auction on Wednesday, selling at between 127-129 compared to 118.32 on Monday and 116.62 a week ago.
It sold only $180 million on Wednesday and $100 million on Monday despite demand of about $2 billion, leaving banks scrambling for dollars from other sources.
There will be no auction next Monday because of the Islamic holiday of Eid.
"There are no spreads being quoted. If you go ahead and trade, on the day of settlement everyone defaults on each other and the central bank has shown today it is not ready to put more dollars into the market," one dealer said.
The central bank has not made any public comment on its exchange rate policy since the naira starting depreciating.
WORRIES OVER FISCAL POSITION
President Umaru Yar'Adua proposed a 2.87 trillion naira ($24 billion) 2009 budget on Tuesday, a slight increase over actual spending this year despite lower world oil prices, and sought approval to breach a budget deficit target of 3 percent.
"There is concern in the market that Nigeria's fiscal position has been impaired significantly by the fall in world crude prices and that the central bank may have taken a decision to allow the naira to trade in a much wider band," said Fola Fagbule, banking analyst at brokerage Afrinvest.
Dealers said dollar demand was being driven by importers ahead of the Christmas trading season as well as by portfolio investors who have been taking money out of Nigeria as the global credit crisis dampens appetite for risk.
But it has also been fuelled by local banks, businesses and individuals worried by the long-term impact of falling oil prices on Nigeria's economy and the strength of its currency, moving their balance sheets into U.S. dollars.
Economists have said a depreciation of the naira may be necessary but that it needs to be carefully managed.
A shut down of the market means foreign investors in anything from equities and bonds to private equity funds are unable to retrieve U.S. dollars.
"Any central bank decision to allow a change in the U.S. dollar/naira is just reflective of changing macroeconomic conditions and represents sensible policy," said Mike Hugman, emerging markets strategist at Standard Bank.
"But it is critical for the confidence of all investors in Nigeria for the forex market to remain open," he said.
