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CBN to combat N1.6trn excess liquidity in February amidst rising business confidence

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Foreign investors invade financial markets with $1.2 billion in January

By Babajide Komolafe

THE Central Bank of Nigeria, CBN, is set to intensify its liquidity mop up efforts to deal with excess liquidity of N1.6 trillion expected in the interbank money market this month, amidst rising business confidence over improved macroeconomic conditions during the month.

The Business Expectation Survey conducted by the apex bank in January shows increased optimism in the economy, with overall Confidence Index, CI, for February rising to 62.1 percent from 25.9 percent for January.

“Respondents were optimistic of better economic conditions as their expectations on the growth of the economy rose steadily in the short run with an index of 35.5, 42.7 and 56.4 points for the current month, next six months and next twelve months respectively,” the CBN said.


However, while businesses expect further appreciation of the naira this month, they also anticipate further increase in interest rates. “Majority of the respondent firms expect the naira to appreciate in the current, next and the next twelve months respectively as their confidence indices stood at 23.0, 31.9 and 44.6 points.

“Respondent firms expect borrowing rates to rise in current, next and the next twelve months as the confidence indices stood at 20.0, 6.7 and 7.6 points, respectively.”

The outlook on higher borrowing rates is in line with projection of  higher interest rate (yield)  on treasury bills this month as the CBN intensify its liquidity mop up to contend with excess liquidity of N1.6 trillion and sustain attractiveness of  the nation’s financial market to foreign investors.

ABCON seeks CBN collaboration to enhance transparency in forex market

Making this projection in the company’s outlook for February,  analysts at Lagos based FSDH Merchant bank, said: “A total inflow of about N2.33 trillion will hit the money market from the various maturing government securities and Federal Accounts Allocation Committee, FAAC, in February 2019. We estimate a total outflow of approximately N644bn from the various sources, leading to a net inflow of about N1.6 trillion. FSDH Research expects the market to remain relatively liquid in February 2019. This may continue to necessitate the issuance of OMO to mop-up the liquidity in the system.

“FSDH Research believes the yields on the Nigeria Treasury Bills, NTBs, may increase further, particularly on the long end from the current levels. NTB yields are likely to be influenced largely by the level of liquidity in the banking system, the short-term borrowing needs of the government, the need to maintain price stability and election considerations.”

Meanwhile cost of funds is expected to fall slightly this week in response to inflow of N783.3 billion from maturing TBs.

Last week, cost of funds rose sharply as the CBN issued secondary market (Open Market Operations, OMO) TBs to mop up N644 billion from the market. The outflow cancelled out the impact of N315 billion inflow from maturing TBs causing average short term interest rate to rise by 758 basis points (bpts).

Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending rose by 760 btps to 18.67 percent last week from 11.07 percent the previous week. Similarly, interest rate on Overnight lending rose by 756 bpts to 19.42 percent last week from 11.86 percent the previous week.

While the apex bank is expected to step up issuance of OMO bills to mop up the anticipated inflow of N783.3 billion this week, analysts at  Cowry Assets Management Limited  expect improved liquidity conditions and moderation in cost of funds during the week.

“In the new week, T-bills worth N783.33 billion will mature via the primary and secondary markets which will more than offset T-bills worth N153.38 billion to be auctioned by CBN via the primary market; viz: 91-day bills worth N3.38 billion, 182-day bills worth N10 billion and 364-day bills worth N140 billion. Hence, we expect liquidity ease in the financial system to be sustained with resultant moderation in interbank rates,” they said.

Foreign investors invade financial markets with   $1.2 billion in January

Foreign Portfolio Investment through the Investors and Exporters (I&E) window shot by 187 percent to $1.32 billion in January, the highest in nine months, from $460 million in December. The upsurge was driven by quest for higher yields by foreign investors in emerging markets, following the decision of the United States Federal Reserves to halt its interest rate hike.

Consequently, FPIs accounted for 51.34 percent of total I&E inflows in January, up  from 17.22 percent in December. Meanwhile the CBN increased its weekly dollar injection through the interbank foreign exchange market to $489.13 million last week.

In addition to the regular weekly injection of $210 million on Tuesdays, the CBN injected $279.13 million on Friday as well as CYN46.92 million through the Retail Secondary Market Intervention Sales (SMIS).

Confirming the additional injection, CBN’s Director, Corporate Communications Department, Isaac Okorafor said: “Figures of the sales consummated on Friday, February 8, 2019 revealed that the sum of $279, 128,518.66 was injected to meet requests of customers in the agricultural, airlines, petroleum products and raw materials and machinery sectors. The sum of CNY46,924,114.04 was for payment of Renminbi-denominated Letters of Credit for agriculture as well as raw materials”, he added.

While expressing the satisfaction of the Bank’s management at the stability in the different segments of the foreign exchange market, Okorafor attributed the level of stability to the Bank’s transparency in foreign exchange transactions.

Reflecting the impact of the increased dollar injection, the naira appreciated in the parallel market and in the I&E window last week.

According to, the live exchange rate platform of the Association of Bureaux de change Operators of Nigeria (ABCON), the parallel market exchange rate fell to N358 per dollar last week from N360 per dollar the previous week, indicating N2 appreciation for the naira.

In the I&E window the naira appreciated by 98 kobo as the indicative exchange rate dropped to N361.73 per dollar last week from N362.71 per dollar the previous week.

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