Implementation of TSA to push up cost of deposit

as naira maintains stability this weekThe implementation of the Treasury Single Account (TSA) is expected to lead to an increase in competition for retail deposits and increase cost of deposits and fund in the short term, Ayodeji Ebo, head, investment research, Afrinvest Securities Limited, says.

The Presidency last week issued a directive to all Federal Government Ministries, Departments and Agencies (MDAs) to begin retirement of revenues into a unified account (Treasury Single Account – TSA) maintained by the Central Bank of Nigeria (CBN).

The TSA, as defined by the IMF, is a unified structure of government bank accounts through which the government transacts all its receipts and payments.

According to the directive, the implementation of the TSA by all MDAs is to enable compliance of MDAs with provisions of the Constitution.

“We view the implementation of the TSA as a major fiscal policy management reform milestone with several benefits. From a policy point of view, TSA will bring about a consolidated view of government accounts and aid efficient management of government cash flow – receipts and payments.

“This will enable increased transparency of government finances as relevant fiscal and monetary agencies will have more oversight of MDAs accounts and cash positions,” Ebo and his team of analysts, said in a report.

Furthermore, the implementation will save the CBN the burden of mopping excessive liquidity (at expensive rate) caused by government revenue allocation and distribution to its MDAs.

More importantly, the TSA will check round-tripping of government deposits by Deposit Money Banks (DMBs) due to the arbitrage between government deposits (bearing close to 0% interest rate) and government borrowing (at over 13.0% interest rate cost to the government).

While the directive issued last week came as the first official statement by the Presidency on the TSA, the Nigerian National Petroleum Corporation (NNPC) had earlier began withdrawing its funds from DMBs for retirement to the CBN. This had an impact on liquidity level in the banking system, resulting in a surge in money market rates during the period as banks scrambled for funds to cover positions.

With the TSA implementation now extended to all federal MDAs, the Nigerian banking industry, on an aggregate basis, would be affected in terms of deposits and funding cost structure.

Data from the CBN as of June 2015 put total deposits (demand, time and savings) in the financial system at N13.5 trillion. Analysis of this indicates that the private sector accounts for a significant 90.7 percent (N12.2trn) of total deposits, while public sector funds accounts for 9.3 percent (N1.3trn).
Breakdown of the total deposits shows that Federal Government deposits make up 5.3 percent (N712.6bn) while state and local governments account for 3.1 percent (N424.3bn) and 0.9 percent (N121.0bn), respectively. Based on the harmonised Cash Reserve Requirements (CRR) of 31.0 percent, N4.2 trillion of total industry deposits in June was quarantined from the banking system. Taken together with other regulatory guidelines such as the Liquidity Ratio (pegged at 30.0%), full implementation of the TSA will isolate approximately 5.3 percent of the available liquidity in the banking system, although, this will vary across banks based on the individual exposure to public sector deposits.

Meanwhile, naira traded flat at N199.10/$1 W-o-W at the inter-bank foreign exchange market, while the CBN continues to intervene at N197/$1.
The local unit experienced moderate volatility in the parallel market last week, closing at N222/$1 on Monday and depreciated to N224/$1 on Tuesday. The naira rebounded 1.4 percent to N221/$1 on Wednesday on account of the $80 million sale made by CBN to Bureau de Change operators. This boosted liquidity in the foreign exchange market and eased the pressure. The naira therefore appreciated 45bps WTD to N221/$1.

The benchmark Crude Oil price (Brent) rose 2.1 percent WTD to $49.21, while Nigeria’s external reserves further improved 0.5 percent MTD and 0.3 percent WTD to $31.6 billion amid CBN’s increased efforts to check speculative attacks on the local currency.