By Babajide Komolafe

Cost of borrowing in the interbank money market rose sharply to 103 per cent on Friday in response to acute scarcity of funds caused by foreign exchange and bonds sale.

Special FX intervention by CBN

On Friday, the Central Bank of Nigeria (CBN) intervened in the interbank foreign exchange market selling Two Months Forwards contract to clear the backlogs on matured forex obligations for raw materials and machineries for manufacturing sector, agricultural chemicals and airlines.

However, bank customers have immediately paid the naira equivalent of the transaction while the CBN delivers the dollars in two months. This triggered huge outflow of liquidity (idle cash) from the interbank money market as banks scrambled for naira to pay for the Forwards contract.

In addition to the above, the interbank money market recorded N90 billion outflows due to Bond auction conducted by the Debt Management Office (DMO) during the week.

These transactions combined with Treasury bill sale of N233 billion earlier in the week caused acute scarcity of funds prompting interbank interest rates to rise by over 90 per cent at the end of the week. According to analysts at FBN Merchant Bank, “Open Buy Bank (OBB) and Overnight rates opened the week at 18 per cent , dropped to 10 per cent due to OMO maturity of N233bn on Thursday, but rose to close at 103.33 per cent due to Bonds auction settlement, OMO sale and CBN special  foreign exchange sale.”

Mixed fortunes for Naira

Meanwhile the naira recorded mixed performance in the foreign exchange market last week. While the naira depreciated marginally at the interbank spot market, it appreciated significantly at the parallel market.

In the interbank forex market, the exchange rate for spot transaction rose 0.33 per cent to N307.77 per dollar from N306.75 per dollar the previous week.

According to analysts at Afrinvest Plc, a Lagos based investment firm, the depreciation, despite the increased dollar supply by the CBN during the week, was occasioned by, “statements made by the MD of the FMDQ OTC exchange – in an interview earlier this week-, where he confirmed that daily FX market turnover has declined to about $1 billion to circa $100 million as unmet demands continue to surge. Accordingly, investor sentiment remained depressed by currency risk as liquidity crunch lingers.”

But at the parallel market the naira appreciated    by 32 per cent to N460 per dollar from N475 per dollar the previous week. The appreciation was prompted by improved supply courtesy of increased dollar sales by Travelex.