…Mixed devt in forex markets as CBN spends $700m to defend Naira 

By Emeka Anaeto, Economy Editor

LAGOS—Banks’ treasury positions have been placed on high alert, following uncertainties surrounding the proposed flexible foreign exchange regime. As a result, system liquidity recorded a massive upsurge of 51.4 per cent to hit N408 billion last weekend against N277.4 billion recorded the previous week.

Emefiele CBN Governor

The liquidity level had averaged N250 billion week-on-week since the reversal of the expansionary monetary policy by the Central Bank of Nigeria, CBN, about three months ago.

Bank treasurers told Vanguard that the heightened liquidity positions came as banks pull back their funds from long term instruments to short term to minimize their risk in the event of adverse development in the foreign exchange market.

The increasing liquidity continued, despite the apex bank’s debiting of banks’ accounts for both foreign exchange demands during the week and subscription to its liquidity mop-up instruments. The CBN was forced to issue further N50 billion Nigerian Treasury Bills, NTB, auction in an emergency Open Market Operation, OMO, in addition to the scheduled N143.9 billion NTB auction mid week.

Though this measure had moderated total liquidity balances in the banks from the peak N463.2 billion, it did not prevent the crash in interbank money rate to 2.8 per cent and 3.2 per cent for Open Buy Back, OBB, and Over-night funds respectively.

Forex market, reserves further pressured

Also the situation further increased pressure on the exchange rate in the parallel market, with Naira depreciating to week’s closing rate of N355/USD1 as against N351/USD1 previous week.

However, CBN official rate remained stable at N197.5/USD1, while Naira appreciated in the foreign exchange forwards contracts closing with the seven days, six months and 12 months dated contracts appreciating by 0.02 per cent, 0.77 per cent and 0.42 per cent to N199.61/USD, N214.10/USD and N220.77/USD respectively.

But despite this mixed development, industry analysts at Cowry Asset Management Limited, a Lagos-based investment house, said last weekend that they anticipated continued pressure on the foreign exchange market against the backdrop of declining foreign exchange reserves.

As at last weekend, analysis of the movement in foreign exchange reserves for the month of May, 2016 showed that it closed 2.6 per cent (US$26.4 billion) lower relative to the level (US$27.1 billion) in April, 2016, implying that an approximate average of US$0.7 billion was used in defending the currency in May alone.

Reacting to this development, financial analysts at Afrinvest West Africa, another Lagos-based investment house, stated “in the interim, pending the clarity on the new foreign exchange policy, we opine that the pressure at the parallel segment will persist.

“Whilst we reiterate our stance on the need to standardize the foreign exchange rate determination to a single market price as the CBN finalises the modality for its flexible foreign exchange regime in the coming days, we believe the Apex Bank needs to be wary of intervening at the rate of N197.00/US$1.00 which is clearly misaligned and also expands opportunity for arbitrage as well as other forms of market distortions”.

As at last weekend CBN was still in consultations with bank industry players to determine the modalities for the new forex policy.

The foreign exchange market in the week remained pressured by the uncertainty around the anticipated flexible exchange rate policy which was communicated to the market at the end of the last Monetary Policy Committee, MPC, meeting of the CBN.

The market had expected that the guidelines for the new flexible exchange rate regime would be communicated early enough to restore normalcy to, not only the money and foreign exchange markets but also the stock market. Last week also the uncertainties forced the stock market to buckle, losing all the gains it had made on the heels of the announcement of the intended flexible foreign exchange regime.