By Babajide Komolafe, with Agency Report

The decision of the Central Bank of Nigeria (CBN) to remove the restriction on foreign investment in government securities was prompted by recommendation of banks‘ treasurers.

Meanwhile, the naira on Friday rose by 110 kobo at the interbank market as operators reviewed exchange rate expectations in response to the decision of the apex bank.

In 2008, in an attempt to stem the rapid outflow of foreign exchange occasioned by foreign investors divesting from the money and capital markets in response to the global financial crisis, the CBN placed a restriction on foreign investment in government securities which requires foreign investors to hold investment in such securities for at least one year before they can divest.

Vanguard investigations however revealed that some banks’ treasurers at a recent meeting with the CBN advocated the removal of the restrictions arguing this would stimulate inflow of foreign exchange and trading in government securities.

Investigations further revealed that though some treasurers opposed the suggestion saying it makes the country vulnerable to ‘hot money’, those advocates of the removal carried the day. Consequently, the Deputy Governor, Mrs. Sarah Alade who chaired the meeting promised that the apex bank would review the policy.

On Friday, the CBN formally announced the removal of the restrictions saying foreign investors are guaranteed unconditional repatriation of their investments in government bond and money market instruments.

Though the apex bank did not advance any reason for its new position, the CBN Governor, Mallam Lamido Sanusi on Thursday said that the naira may appreciate to N145 per dollar due to foreign exchange inflow expected to be induced by the removal of the restriction. “Positive interest rates” will contribute to the gain, he said.

Though investment analysts at Citigroup Inc., Renaissance Capital and Exotix Ltd have expressed doubt that the removal of the restriction would lead to appreciation of the naira to N145 per dollar as predicted by the CBN, the naira on Friday recorded 110 kobo appreciation at the interbank market.

From N156.85 per dollar on Thursday, the interbank exchange rate closed at N155.95 per dollar on Friday. On Thursday, the naira had depreciated by 17 kobo in the interbank market, while it depreciated by 44 kobo at the official market last week. A senior foreign exchange dealer who spoke on condition of anonymity said that the appreciation of the naira was due to expectation of increased inflow of foreign exchange in response to the removal of the restrictions, hence downward review in exchange rate quoted by banks.

“There are still underlying fundamental problems, for example high inflation and government spending,” Leon Myburgh, a Johannesburg-based strategist at Citigroup, said. “This move is certainly positive, but we may not be that optimistic. We would rather go for 152 per dollar for year-end”, he added.

“Nigeria’s fiscal metrics and oil-revenue leakages place substantial pressure on the exchange rate, which could be contained by more foreign capital inflows, but are unlikely to be entirely offset,” Samir Gadio, a London-based emerging markets strategist at Standard Bank Group Ltd., said. “Some currency appreciation is likely to take place in 2011, but the magnitude of the move will depend on global risk perception in coming months as well as the extent to which some fiscal consolidation materializes in Nigeria.

“The new capital inflows are more likely to stabilize the naira, but not bring about an appreciation in itself,” Yvonne Mhango, a Johannesburg-based sub-Saharan Africa economist at Renaissance Capital, said by e-mail. “For appreciation to occur, the outflows in the current account would have to slow,” she said, adding that she expects the naira to end the year at 153 per dollar.

Exotix expects the naira to maintain a level of about 149.5 per dollar this year, said Stuart Culverhouse, the chief economist at the frontier market investment bank in London.

In a circular formally announcing the lifting of the requirement that foreign investors hold investment in government securities for at least a year before they can divest, the apex bank said, “foreign investors are guaranteed unconditional repatriation of their investments on maturity from the domestic foreign exchange market.”

The statement was made in a circular signed by the Director, Trade and Exchange Department, Mr. Musa Batari and titled , Re: Purchase of money market instruments and federal government bonds.”