Naira depreciates as external reserves maintain downward trend

Naira exchange*Cost of funds fall as excess liquidity rises to N627 bn

20 January 2014, Lagos – The naira depreciated across all the three segments of the foreign exchange market last week in response to increased demand for foreign exchange. Vanguard investigation revealed that the naira depreciated by 200 kobo at the parallel market as the parallel market exchange rate rose to N171 per dollar at the close of business on Friday from N169 per dollar in the previous week.

The naira also depreciated by 37 kobo at the interbank market, as the interbank rate rose to N159.86 per dollar from N159.49 per dollar. The official exchange rate also rose marginally to N155.74 from N155.72 the previous week, implying two kobo depreciation for the naira.

Cumulatively, the naira has depreciated by 107 kobo at the interbank market, and four kobo at the official market
The depreciation was occasioned by demand pressure, which was aggravated by reduction in the foreign exchange sold by the Central Bank of Nigeria (CBN) last week. Results of the Retail Dutch Auction System (RDAS) session held last week show that foreign exchange sales dropped by 6.6 per cent to $699.96 million from $749.84 million.

Last year, the apex bank sold $25.37 billion, up by 32.9 per cent from $19.1 billion sold in 2012. From $3.88 billion in the first quarter, foreign exchange sale rose by 70 per cent to $6.62 billion. In the third quarter, it rose again by 22 per cent to $8.09 billion.

Meanwhile, the nation’s external reserves maintained its downward trend falling by $200 million last week. From $43.276 billion in the previous week, the external reserves dropped to $43.256 billion Thursday last week. Cummulatively, the external reserves have declined by $354 million.

Last year, it rose from $45.98 billion in January to a peak of $48.85 billion before falling steadily to $43.61 in December.
On the other hand, cost of funds in the interbank money market declined further last week, courtesy of excess liquidity (idle cash) which rose to N627 billion last week.

Vanguard investigation revealed that interest rate on Overnight lending stood at 10.25 at the close of business on Friday, down from 10.5 per cent the previous week. Similarly, interest rate Open Buy Back (OBB) or secured lending dropped to 10.15 from 10.25 per cent.

The decline in cost of funds reflected the robust liquidity in the interbank market during the week. From N393.263 billion at the beginning of the week, excess liquidity rose steadily to close the week at N627.655 billion naira.
The increased liquidity also impacted the FGN Bond offer by the Debt Management Office (DMO) last week, which recorded 92.2 per cent over subscription. The DMO offered N90 billion of bonds, while public subscription stood at N173.96 billion.
*Babajide Komolafe – Vanguard

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