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Nigeria: Government shores up naira

The Central Bank of Nigeria tightened its foreign exchange management on January 19, moving from a wholesale to a retail Dutch auction system. Applications for international currency must therefore now be deal-specific.

The intention of the Nigerian authorities is to discourage speculation against the naira, something that has added to the pulls of falling oil prices and a strengthening dollar. But the result has been a dramatic widening between the official and unofficial foreign exchange rates.

Before November, Nigeria’s currency resisted remarkably well the drop in the oil price that started last summer. Throughout the first 10 months of 2008 the naira remained relatively stable at about 117 to the dollar. But between November and mid-January, the currency fell by more than a third to about 160.

So far, the new obligation for declarations of the purpose of demands for foreign exchange on a deal-by-deal basis has caused the currency to stabilize at about 150.

"The depreciation of the naira in November, December and in the first half of January came as a culmination of events that reached stress point. The authorities appear to have drawn a line in the sand at 150," says Matthew Pearson, an Africa analyst at Russia’s Renaissance Capital in London. Pearson says demand for foreign exchange at the Nigerian central bank has fallen from about $1 billion a day to about $250 million since the tightened controls were announced.

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