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Cost of funds decline to persist as N1tr inflow aggravates excess liquidity

•CBN injects $543m as reserves slides to 5mths low

By Babajide Komolafe

Cost of funds will decline further this week in the interbank money market as inflow of over N1 trillion from statutory allocation funds and maturing treasury bills (TBs) aggravates excess liquidity in the market.

Naira notes
Naira notes

Last week cost of funds declined for the second consecutive week, with average interest rate for short term lending falling by 150 basis points in two weeks.

Data from FMDQ showed that interest rate on  Collateralised lending (Open Buy Back, OBB) fell by 108 basis points (bpts) to 6.75 percent last week from 7.83 percent the previous week. Similarly, interest rate on Overnight lending dropped by 58 bpts to 7.92 percent last week from 8.5 percent the previous week.

The decline in cost of funds was facilitated by    persistent excess liquidity in the interbank money market, worsened by inflow of N364.33 billion from matured Open Market Operation (OMO) TBs. The situation was compounded by the unsuccessful efforts of the CBN to mop up the inflow with new OMO TBs of equal value due to investor resistance.

Financial Vanguard  analysis revealed that    the N363.33 billion OMO TBs offered by the apex bank was undersubscribed by 73 percent with investors purchasing just N97.9 billion.

Consequently, the market ended with excess liquidity of N360 billion, while banks’    placement of idle funds in the CBN’s

Standing Deposit Facility (SDF) stood at N225.27 billion as against borrowing of N6.70 billion through the Standing Lending Facility (SLF).

While the CBN will this week sell primary market (fresh) TBs worth N206.95 billion, analysts project that    excess liquidity will    rise further    due to combination of continued investors’    resistance to CBN’s liquidity mop up efforts through OMO TBs and    inflow of over N1 trillion.

The inflow comprises N521.72 billion from maturing TBs and over N500 billion from statutory allocation funds to be disbursed to the three tiers of government this week by the Federal Accounts Allocation Committee (FAAC).

In their projection for the week, analysts at Lagos based Cowry Asset Management Limited said: “This week, T-bills worth N521.72 billion will mature via the primary and secondary market which will more than offset T-bills worth N206.95 billion to be auctioned by CBN via the primary market; viz: 91-day bills worth N24.96 billion, 182-day bills worth N44.99 billion and 364-day bills worth N137.00 billion. Hence, we expect liquidity ease in the financial system to be sustained with resultant moderation in interbank rates.”

CBN injects $543m…as reserves slides to 5mths low

In a bid to sustain exchange rate stability, the CBN, last week, increased its weekly foreign exchange intervention to $543 million. The apex bank also sold 63.21 million worth of the Chinese Yuan.

However, the nation’s external reserves continued its downward slide as it fell to $46.129 billion last week Thursday, the lowest in five months. According to data on the CBN’s    website, the reserves fell for the seven consecutive weeks by $290 million to $46.129 billion last week Thursday from $46.419 billion Thursday of the previous week.

On the domestic foreign exchange market, the CBN on Thursday sold $210 million comprising $100 million allocated to the wholesale segment, $55 million allocated to the Small and Medium Enterprises (SMEs) window, $55 million allocated for      invisibles such as Business/Personal Travel Allowances, tuition and medical fees.

On Friday, the apex bank complemented the $210 million intervention with injection $323.22 million into the interbank retail Secondary Market Intervention Sales and CNY 63.21 million in the spot and short-tenored forwards, arising from bids received from authorized dealers.

Confirming the interventions, Acting Director, Corporate Communications, CBN Mr.    Isaac Okorafor, said the apex bank remained committed to maintaining the country’s external reserves to safeguard the international value of the naira in line with its    mandate.

According to him, the bank’s management of the forex market had entrenched transparency in the market and continued to strengthen the value of the naira against other major currencies of the world.

Reflecting the impact of the interventions, the naira last week appreciated in the parallel market and in the Investors and Exporters (I&E) window.

While the naira appreciated by N1.3 in the parallel market, it appreciated by 15 kobo in the I&E window.

According to naijabdcs.com, the live exchange rate platform of the Association of Bureaux De Change Operators (ABCON), the parallel market exchange rate dropped to N358.3 per dollar last week from N359.6 per dollar the previous week translating to N1.3 kobo appreciation of the naira.

Data by the FMDQ showed that the indicative exchange rate for the I&E window dropped to N362.35 per dollar last week from N362.5 per dollar the previous week indicating 15 kobo appreciation for the naira.

However, the volume of dollars traded in the window dropped by 43 percent last week to $840.56 million from $1.488 billion the previous week.

 


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