…As CBN to intensify liquidity mop-up while inter-bank battles N1.2trn excess liquidity***

The naira remains stable at the official and parallel markets, with the foreign exchange (forex) reserves standing at $46.7billion, a report by Exotic Capital, an investment and research firm, has said.

The naira exchanges at 362 to the dollar in the parallel market and 305.6 in the official market. It has remained at those rates since April, last year, after the Central Bank of Nigeria (CBN) resumed forex interventions in the market.

The report said although the level of reserves was still below the record high of $64 billion realised in August 2008, it is nearly double the $24 billion recorded in October 2016, increasing by more than $22 billion in 15 months.

The reserves hit $46.7 billion on March 29, from just over $23 billion in October 2016, as the economy continues to attract huge investment inflows from foreign investors.

The economy benefited from increased forex supply with over $20 billion inflow to the Investors’ & Exporters’ (I&E) Forex Window since inception in April 2017.

The report said the macro fundamentals suggested the Central Bank of Nigeria’s (CBN’s) appropriate reaction function would have been to hold rates unchanged as it did in last week’s Monetary Policy Committee MPC meeting.

“We have written extensively on Nigeria’s multiple exchange rate system and will abstain from further discussion at present, suffice to say that a fairly valued naira at 360 to the dollar combined with high domestic rates has led to a tremendous increase in the level of gross foreign reserves held at the CBN,” the report said, adding:

”With reserves at their current levels, it is easy to imagine the MPC being in a position where it could afford to cut as it is less dependent on attracting dollar inflows than it has been to both build reserves and stabilise the naira.”

A similar report by FBN Capital, titled: “Towards the $50 billion threshold, and counting”, said the rapid accumulation of $15.96 billion over 12 months was due to two sizeable Eurobond launches, a small diaspora bond issue, the recovery in oil export revenues (through the Nigeria National Petroleum Corporation’s share of production and, more recently, the steady bid by the CBN at the I&E Forex window.

“We should stress that the data are gross and mask the swap transactions the CBN has entered into with local banks. The steady bid by the CBN has been seen variously as a response to the softening of demand for forex by importers and other economic actors, and as a move to contain naira appreciation,” the FBN Capital said, adding:

“The CBN will be pleased with the healthy signals from I&E Forex window where the weekly average has now settled above $1 billion. Reserves at end-March covered 17 months’ merchandise imports, and 10.9 months when we add services. These calculations are based on the balance of payments for 2017. The ratios are a little less impressive, but still robust, if we use the measure of current account payments (including income debits) favoured by the ratings agencies.”

Before the stability in the forex market and naira, the economy witnessed a depressed Gross Domestic Product (GDP) growth, which culminated in a recession in 2016.

There was also rising inflation, which peaked at almost 19 per cent in January 2017 and a persistently rising unemployment rate to 14.23 per cent in 2016 fourth quarter from 6.41 per cent as at 2014 fourth quarter.

There was also a significant depreciation of the exchange rate, reaching N525 to $1 in February 2017 and witnessed a fast depletion of the reserves which bottomed out at about $23.6 billion in October 2016 from as high as $40 billion in January 2014.

Meanwhile, the Central Bank of Nigeria (CBN) is expected to intensify its liquidity mop-up operations this week to address the build up in excess liquidity in the interbank money market which rose to N1.2 trillion last week. Financial Vanguard investigations revealed that  the volume of  excess liquidity in the  interbank money market rose by 161 percent to N1.2 trillion last week  from N459.7 billion the previous week.

The upsurge was triggered by inflow of N528.9 billion from matured treasury bills as well as inflow of  N647 billion statutory allocation distributed to the three tiers of government by the Federal Accounts  Allocation Committee (FAAC). As a result, average interbank cost of funds fell by 353 basis points (bpts) to 3.8 percent. Data from FMDQ showed that cost of funds on Collateralised (Open Buy Back, OBB) lending fell by 353 bpts to 3.67 percent last week, from 7.2 percent the previous week. Similarly interest rate on Overnight lending fell by 400bpts to 4.0 percent from 8.1 percent the previous week.

Reflecting the impact of the upsurge in market liquidity, treasury bills (TB) trading last week recorded oversubscription. On Wednesday, the  N700 billion worth of secondary market (Open Market Operations, OMO) TBs  offered by the CBN in a bid to mop-up excess liquidity, recorded 7.0 percent oversubscription, as total subscription stood at N748.7 billion.

The offer comprised of N200 billion worth of 91-Days OMO bills which attracted subscription of N63.9 billion  and N500 billion worth of 245-Days OMO bills which attracted N684.8 billion subscription.

Nation with additional report from Vanguard