CBN To Implement FX Dutch Auction System To Stabilise Market

In a strategic move to address the persistent foreign exchange (FX) fluctuations in Nigeria’s forex market, the Central Bank of Nigeria (CBN) has announced the introduction of a Retail Dutch Auction System.
The system is scheduled to commence on Wednesday, 7 August 2024. This decision comes in response to the significant increase in demand for foreign exchange in recent months, as noted in a circular released over the weekend.
The CBN’s initiative aims to stabilise the naira and manage the escalating FX demand. By implementing the DAS, the apex bank seeks to provide a more structured and transparent mechanism for FX allocation, ensuring that genuine demands are met efficiently.
To participate in the Dutch Auction System, the CBN has instructed all authorised dealer banks to compile a comprehensive and credible list of outstanding FX demands from their end users. This measure ensures that the auction addresses the actual needs of the market participants.
In its recent directive, the CBN emphasised that “the accounts of prospective customers must be naira-backed to qualify for participation in the auction, ensuring immediate settlement upon confirmation of bid acceptance by the CBN.” This requirement is designed to streamline the auction process and ensure timely fulfilment of FX transactions.
According to recent data from FMDQ, the value of the naira depreciated to N1617.08 per dollar last week, despite the CBN’s efforts to stabilise the currency. In the past three weeks, the apex bank has intervened by providing $254.5 million to FX authorised dealers. However, these measures have not been sufficient to curb the volatility in the FX market.
The introduction of the Retail Dutch Auction System is expected to bring several benefits to Nigeria’s FX market. The DAS will provide a clear framework for FX allocation, reducing uncertainties and potential discrepancies. In meeting genuine FX demands, the system will help alleviate the pressure on the naira and support economic stability.
A structured auction system is likely to boost confidence among market participants, potentially attracting more investment and reducing speculative activities.
As Nigeria continues to navigate its FX challenges, the CBN’s proactive approach with the DAS represents a significant step towards achieving a more stable and resilient forex market.