Real sector dominates $876.26m CBN Dutch auction

Players in the real sector dominated the retail Dutch Auction System conducted by the Central Bank of Nigeria on Tuesday.

According to the sales report, which was published by the apex bank on Friday, 3347 firms got access to the dollars via the 26 banks, which qualified at the rate of N1,495 per dollar cut-off rate.

About $876.26m was sold during the auction, which the CBN initiated to mitigate the rising demand pressures in the foreign exchange market and to promote price discovery.

The sales report showed that businesses in the manufacturing sector benefited from the auction, as they got dollars to import spare parts of machinery, industrial raw materials, plain paper in sheets, raw materials for books), pharmaceutical products, raw materials for brewery, brewery equipment, plant and machinery.

The other reasons for which the industries got the FX included tobacco rolling paper, spare parts for low loaders and cranes, frozen fish, etc.

Promasidor Nigeria Limited got about $59.772 for Cowbell Instant dairy creamer, and Sumal Foods Limited got dollars for glucose syrup, hydrogenated vegetable fat and dextrose monohy.

African Foundries, International Towers Limited, Crown Flour Mills, Churchgate Investments Ltd, Nucleus Ventures, HIS (Nigeria) Ltd and others got the dollars to facilitate loan repayments.

This auction marks one of the most significant FX interventions by the CBN under the leadership of Governor Yemi Cardoso, who has been actively working to stabilise the naira and address the ongoing volatility in the FX market.

Companies under Dangote Industries got about $105.33m in successful foreign exchange bids via Zenith Bank, Access Bank, Providus Bank, Union Bank and Sterling Bank.

According to the CBN, the beneficiary’s subsidiaries include Dangote Sugar Refinery, Dangote Cement, Dangote Oil & Gas Company, Dangote Agro Sacks and Dangote Coal Mines.

Companies in the BUA Group; BUA Cement, BUA Foods, and BUA Sugar Refinery, also assessed dollars via Access Bank, Greenwich Merchant Bank, Coronation Merchant Bank, FirstBank of Nigeria, Zenith Bank, Union Bank of Nigeria and Sterling Bank.

Some of the reasons for that included wheat, gypsum in bulk, raw sugar in bulk, machinery and equipment and infield drip irrigation systems.

For the auction, the CBN said that the total bids received were valued at $1.19bn.

After the collation, the Committee of Governors of the apex bank approved a cut-off bid of N1495.00/$ with a total successful bid of $815.36m.

The range of successful bids was N1495.00/$ N1650.00/$ across 26 banks. Six banks were disqualified; four banks for submitting bids after the 6-hour submission period stipulated (9:00 a.m.–3:00 p.m.) and two banks for not providing bids in the template supplied.

Zenith Bank, FirstBank and Access Bank were the top three banks to get FX from the Dutch auction.

Other banks in the top 10 included Fidelity Bank, Guaranty Trust Bank, Standard Chartered Bank, Taj Bank, Jaiz Bank, Sterling Bank and Union Bank.

The Retail Dutch Auction System adopted by the CBN involves the sale of FX through an auction system to end users.

It starts with a call for the submission of bids for an auction and all the bids are collated and arranged from the highest bid to the lowest bid.

The auction mechanism is predicated on the volume of the FX that is available for sale.

In addition, it is also to give forward guidance on the price of the exchange rate that will promote FX market stability.

The cut-off point of an auction is the lowest exchange rate, which clears the volume that is offered for the auction.

The CBN said that the system was introduced and used by the CBN in 1987, 1990 and 2002–2006.

In its weekly update, Afrinvest analysts argued that the apex bank did not possess the required financial war chest to meet the average FX demand for an extended period.

In the days following the auction, the naira appreciated 1.7 per cent at the Nigerian Autonomous Foreign Exchange Market window to end the week at N1,574.2/$.

“First, we are of the view that Dr Cardoso, during the last MPC meeting, stated that the country’s foreign reserves of $37.1bn could cover 11 months’ imports. This implies a monthly average import spend of $3.3bn. Meanwhile, the IMF, in its 2024 Article IV consultation note, estimated Nigeria’s monthly import bill at $6.0bn, implying that the reserves could only cover six months of imports.

“Regardless of the estimate considered, the FX reserves could run dry in six to nine months should the magnitude of the bids at the auction ($1.2bn) be met weekly and the accretion rate does not offset outflows. In addition, seasonality trends suggest that FX demand for manufacturing imports, educational commitments and summer travel peaks in Q3. Hence, we are of the view that the measure will only temper the demand pressure that is building up,” it stated.

According to the firm, the auction pricing closely reflects existing reality in the wholesale FX market – the NAFEM rate has swung between N1,450/$ and N1,600/$ in most of 2024.

“This highlights the fact that the FG’s goal of bringing the NGN/USD rate to N800.0/$ by year-end is unlikely. As such, we hold to our view that for the naira to regain lasting strength, there is a need for the implementation of strategic fiscal policies to boost economic productivity.

“Without an increase in oil production (to at least 1.80mbpd), higher remittances flow through official channels (to at least $20.0bn per annum), and improved inflows of patient longer-term capital (FDI of at least $10.0bn per annum), the naira would remain in the shadow of the FG’s dream target,” the analyst said.