The Central Bank of Nigeria (CBN) will this week mop up N245 billion from the interbank money market in a bid to reduce money supply in the economy. Meanwhile, cost of funds in the interbank money market fell by more than 50 percent last week due to inflow of N315 billion which increased the amount of idle funds in the market.
Vanguard investigations revealed that the CBN will this week mop N245 billion through sales of government securities (treasury bills). The apex bank plans to sell N45.1 billion worth of 91 days bills, N80 billion worth of 182 days bills and N120 billion worth of 364 days bills. This is to mop up liquidity that would be injected into the system through payment for matured bills of the same amount and category.
Last week, the market experienced N315 billion inflow comprising N268 billion from Federation Allocation Accounts Committee (FAAC) funds and N47 billion representing Coupon (interest) payment from FGN Bond maturing in 2022. Consequently, market liquidity rose from minus N700 million the previous week to N433 billion at the close of business on Friday.
In response, cost of funds dropped by more than 50 percent with interest rates on Overnight and Colateralised (Open Buy Back) lending fall to 5.0 percent from 12 percent the previous week. The liquidity increase also triggered excess demand for treasury bills (TBs), with investors demanding for N249 billion worth of bills as against N120 billion worth of bills offered by the CBN.
Naira depreciation to persist The downward trend of the value of the naira against the dollar is expected to persist this week. Last week, the naira depreciated by 5.2 percent or N15.91 at the interbank market as the interbank exchange rate (spot) rose to N321.16 per dollar on Friday from N305.25 per dollar the previous week. The depreciation was triggered by intense scarcity of dollars in the foreign exchange market.
The naira also depreciated at the Bureaux De Change and the parallel market segments by 1.37 percent and 0.80 percent to N370 and N378 per dollar respectively as unmet dollar demand from the interbank market continued to spill into the alternative market segments. The plight of the naira was worsened by the directive of the CBN that banks should publish details of foreign exchange transactions on the Financial Market Dealers Quote (FMDQ) platform.
According to Managing Director/Chief Executive, FMDQ, Mr. Bola Onadele, “The Central Bank of Nigeria is very interested in credible price formation for the spot foreign exchange market. It is also imperative for price discovery and liquidity assessment of our market, which are key to activate foreign portfolio investment flows.”
“Banks should publish all their so-called “off-line trades” on the trading system “within 30 minutes of execution of such transactions”, he said in an email to foreign exchange dealers on Monday.
A notable development during the week occurred on Thursday when the CBN settled $697million in matured month futures contract, being total settlement amount to its banking counterparties at N279 per dollar on Wednesday, 27 July 2016. However, the expired contract was replaced by a new one year contract, which expires on July 19th 2017, with a total notional amount on offer of $1 billion at N250/USD.
On the other hand, foreign exchange traders executed fifty one deals worth USD189.37 million between Monday and Thursday.
The scarcity of the dollar in the foreign exchange market is expected to persist this week leading to further depreciation of the naira. Analysts at Cowry Assets Management Limited, a Lagos based investment and research firm however expressed concern that the widening gap between the interbank and parallel market exchange rates creates opportunities for sharp practices. “We are worried that the increasing gap between the interbank market rate and the parallel market rates may create arbitrage and round tripping opportunities.
In the current week, we expect sustained pressure on the Naira as the dollar remains in short supply,” they said