Updated: Banks run out of naira to buy dollars as overnight interbank rate spikes to 300%

The Nigerian interbank market offer rate spiked to 300 percent just before banks went on Easter break, as  the Central Bank’s Open Market Operations (OMO) and foreign exchange sales drained naira liquidity and pushed up the cost of money.

Traders said that the inter bank plunged into a naira deficit of N160 billion, forcing some banks to even approach the Central Bank window for cash.

Owing to the naira shortage, the interbank overnight lending rate- which is the rate at which commercial banks lend to one another, ballooned by 100 percentage points, to 300 percent on Thursday, from 200 percent on Wednesday.

Traders said banks scrambled to raise enough naira to buy up a N134 billion government bond on Thursday but could only come up with N105.64 billion, N29 billion less than the government wanted.

Gains from investment in government securities, with interest rates anywhere around 18 percent, have seen banks raise holdings of government debt in recent months. Monetary authorities opted to leave benchmark lending rates at a record high of 14 percent, to attract portfolio investors and stabilise inflation.

The naira crunch is likely to cool by the end of April, according to Ayo Akinwunmi, head of research at FSDH Merchant bank. “It is a short term development that will fizzle out, given the N474 billion in bond maturities expected before the end of April,” Akinwunmi said.

The Federation Account Allocation Committee (FAAC) disbursements for March are also tipped to ease the naira liquidity crunch.

FAAC disbursements rose 20 percent to N514.15 billion, shared among the three tiers of government in February 2017 from N430.16 billion shared in January, according to the Office of the Accountant-General of the Federation.

To forestall a steeper decline in its ailing naira currency which shed 40 percent of its value, following a big devaluation last June, the CBN has aggressively mopped up liquidity through OMO auctions and has sold dollars to ease a dollar crunch brought on by low price and output of oil, as well as shrinking portfolio inflows.

The CBN’s activities seem to be mopping naira liquidity and stifling demand for dollars.

The bank said authorised dealers bought $45 million out of $100 million it made available at an auction on the spot market last week, despite the huge appetite for dollars by companies starved of the greenback to import critical inputs.

“There is a challenge in the market, whereby there is limited naira to pay for dollars. The banks are running out of naira to buy much needed dollars,” Egie Akpata said in an interview with CNBC Africa.

“This is why the interbank lending rate has jumped to around 300 percent,” Akpata added.

While doubts of sustaining its dollar sales mount, Godwin Emefiele, the CBN governor, says he is committed to a currency regime that has left foreign investors on the side-lines of the markets and exacerbated a dollar crunch.

Transactions in the foreign exchange market settled at $9.72 billion in March, an increase of 50.59 percent ($3.27bn) when compared with the value recorded in February ($6.46bn), according to data compiled by BusienssDay.

This increase was largely due to increased supply of dollars into the market by the CBN.

The CBN sold a total of $1.24 billion through various interventions conducted during the period under review.

The apex bank also moved its marginal rate for the Secondary Market Intervention Sales (SMIS)–Wholesale Forwards to ₦320 from ₦315; as well as the rate for invisibles (Personal & Business Travel Allowances, medical bills, school fees etc.) from ₦370 to ₦357 to the US$.

The CBN has also shortened the tenor of its forward sales to as low as seven days in a bid to improve dollar liquidity in the market.

Nigeria’s financial markets closed for a public holiday on Thursday, and will not open until April 18.

 

LOLADE AKINMURELE