By Babajide Komolafe
Intense scarcity of funds enveloped the interbank money market last week sending cost of funds a year high of 30 percent.
Reflecting the intensity of the scarcity of funds, market liquidity fell to minus N48.23 billion on Friday from N142 billion at the beginning of the week.
According to data from the Financial Market Dealers Quote (FMDQ), interest rate on Overnight lending rose by one and half to 30.92 percent on Friday from 11.92 percent the previous week. Interest rate on Secured lending also rose by one and half to 29.17 percent from 11.54 percent.
The sharp increase in cost of funds was occasioned by the intense scarcity of funds following the withdrawal of N500 billion for the 500 basis points increase to 20 percent in banks’ cash reserve requirement (CRR) by the Central Bank of Nigeria (CBN) and huge outflow to fund purchase of foreign exchange through the bi-weekly Retail Dutch Auction System (RDAS) sessions.
Meanwhile, the naira suffered further depreciation in all the segments of the foreign exchange market last week. At the official segment, the naira suffered N3 depreciation as the official exchange rate rose to N168 per dollar from N165 the previous week.
At the interbank market, the naira lost N1.4 against the dollar as the interbank exchange rate rose from N178.7 per dollar the previous week to close the week at N180.1 per dollar.
The depreciation of the naira at the interbank market was moderated by the intervention of the CBN, through special dollar sale during the week, which brought down the interbank rate from N184 on Monday to N178.6 on Wednesday.
At the parallel market the Naira suffered heavily against the dollar, Euro and British Pounds. The parallel market exchange rate for the dollar rose to another high of N188 per dollar, from N182 the previous week, indicating N6 depreciation against the dollar.
Against the British Pounds, the naira lost N23 naira as N296 exchanged for one Pound, up from N273 the previous week. The naira also lost N11 against the Euro, with as the Euro exchange rate rose to N228 from N217 the previous week.
Bureaux De Change (BDC) operators attributed the heavy depreciation of the naira to development in the interbank market. They said the parallel market depends on dollar sales by banks, hence the rate in the market is determined by the exchange rate at which they dollars from the banks.
The decline in the nation’s external reserve persisted last week, as it fell by $360 million to $36.44. Consequently, the external reserve has fallen by $7.13 billion this year, from $43.93 billion at the end of 2013.
The persistent decline in external reserve is driven by foreign exchange sales through RDAS and for intervention in the interbank market.
Though the apex bank reduced dollar sales through RDAS by 46.9 percent to $459.46 million last week, it however sold undisclosed amount of foreign exchange directly to banks at arrest further depreciation of the naira in the interbank market.