02 November 2015, Lagos – THE sustained liquidity surfeit in the system may have boosted cash levels in the respective vaults of banks, as well as reduce the level of borrowings at the discount window of the Central Bank of Nigeria (CBN).
The high level liquidity, which had remained since the apex bank’s credit to financial institutions to balance excess withdrawals arising from the implementation of Treasury Single Account, has also crashed money market rates to record lows.
While borrowings of banks at the discount window declined by N40.5 billion to N33.6 billion at the beginning of last week, interbank rates remained broadly flat, with the Overnight and secured Open Buy Back (OBB) instruments closing at 5.3% and 5.8%.
These rates had reached a record high of over 100 per cent on the deadline of the implementation of TSA, as financial institutions scramble for cash to meet obligations after being debited by CBN.
The money market rates remained broadly liquid last week, resulting in single digit interbank rates, lower Nigeria Interbank Offered Rate and treasury bills rates.
Meanwhile, similar to previous weeks, the exchange rate at the interbank market was little changed as it stayed within the CBN administrative corridors of N199.07- N199.10/$.
The CBN revalued the currency by 30 kobo to N196.97/$ on Monday but eased it to N197/$ on Thursday when it held a major currency auction to banks to fulfil some of the backlogs of foreign exchange demand.
However, at the parallel market, the Naira continued to struggle, as it exchange in the range of N223-N225 throughout the week.
System liquidity had opened higher at N494.7 billion on Monday relative to N329.2 billion the previous Friday, as CBN made refunds for unsatisfied Naira provisions made ahead of the currency auction held the previous week.
Rates dipped further on Tuesday as liquidity balance of banks slightly expanded after more banks received refunds for the foreign exchange provisions.
However, the announcement by the CBN that it would be making another foreign exchange auction last week, led to a squeeze in financial system liquidity as banks made provisions ahead of the auction, hence rates trended higher in the mid-week.
Consequently, Overnight, OBB and NIBOR average closing rates were at week-highs of six per cent, 6.6% and 13.6% on Wednesday respectively.
Also, the repayment of N187 billion worth of maturing Open Market Operations bills on Thursday and further inflow from Federal Accounts and Allocation Committee (FAAC) distribution, which hit the system eased liquidity conditions in the market.
Already, the Overnight and secured Open Buy Back (OBB) ended the week at 4.8% and 3.9% when measured week-on-week, closing at 0.9% and 1.3% respectively.
“Activities in the treasury bills market mirrored the liquidity dynamics in the money market during the week. Rates were little changed at the start of the week but started trending downwards from Wednesday due to improved buying interests in short to mid-term tenors in expectation of liquidity inflows from FAAC and OMO repayments.
“Average rates across tenors fell 32bps to 8.1% on Friday. There are no maturing bills next week but we expect interbank rates to stay at current levels as we expect refunds of FX provisions made this week and the FAAC funds to keep the market liquid,” Analysts at Afrinvest Securities Limited, said in a note to The Guardian.
But against the backdrop of further calls for by the former CBN Governor, Emir Muhammadu Sanusi II, CBN maintained that there will not be such policy option.
“Although we acknowledge that the CBN’s foreign exchange demand management measures have successfully reduced demand and currency utilisation by bank by about 30% between first and second quarters of 2015, the current level of external reserves (which gained US$73.3 million during the week to US$30.13 billion can only cover 6.8 months of import by our estimation.
With crude oil prices not expected to recover in the short term, the expansionary fiscal posture of the government is likely to necessitate an adjustment in domestic foreign exchange rate in the short to medium term,” the analysts added.