Banks have been borrowing from the Central Bank of Nigeria (CBN) to purchase foreign exchange (FX), a practice that has intensified pressure on the Naira and inflation, according to Bismarck Rewane, managing director/CEO of Financial Derivatives Company Limited.
Rewane highlighted that the CBN’s recent decision to adjust the asymmetric corridor around the Monetary Policy Rate (MPR) to +500/-100 basis points after a two-day Monetary Policy Committee (MPC) meeting would significantly impact borrowing costs.
The CBN’s rate adjustments at its window followed BusinessDay’s report on Deposit Money Banks’ borrowing from the Central Bank in the first five days of July 2024 hitting an all-time high of N5.38 trillion.
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“Before now, banks were borrowing at about 26 percent. As of today, they will be borrowing at almost 32 percent,” Rewane explained. “That difference of almost 5 to 6 percent means that the cost of borrowing from the CBN to buy FX has gone up astronomically. This increase acts as a deterrent to borrowing from the Central Bank to buy FX and should reduce the pressure on the Naira. It’s all meant to make things much easier,” he said.
The naira on Tuesday lost 3.13 percent of its value against the dollar despite an increase in the greenback at the official foreign exchange (FX) market.
After trading on Tuesday, the dollar was quoted at N1,548.76, lower than N1,500.32 quoted on Monday at the Nigerian Foreign Exchange Market (NAFEM), data from the FMDQ Securities Exchange indicated.
The dollar supplied by willing sellers and willing buyers declined by 4.09 percent to $280.92 million on Tuesday from $269.88 million recorded on Monday.
At the parallel market, popularly called the black market, the Naira experienced a sharp decline, falling to 1,687 per dollar, according to Rewane.
Previously, it had peaked at 1,915 a few months ago and then stabilised at around 1,500. However, this afternoon it dropped to 1,687. This decline is attributed to uncertainty about the availability of reserves to support the currency.
In the past three years, the CBN has raised interest rates 12 times, with five hikes and four adjustments to the symmetric corridor. Rewane noted that these measures have had a more substantial effect on liquidity than the 50 basis points increase in the MPR.
“There is a subtle and nuanced way of telling banks to stop robbing Peter to pay Paul. Banks go to the Central Bank, use the money there to buy FX, and sell it to customers, essentially engaging in a form of carry trade,” Rewane said.
Regarding the impact of these changes, Rewane pointed out that between July 2021 and 2024, interest rates have increased by 15.25 percent, while inflation has risen by 16.81 percent. He suggested that the relationship between interest rates and inflation could lead to a better outcome with the recent adjustments.
“When you add this other adjustment, we should see a better effect. Quite frankly, the whole idea is to manage inflation effectively,” Rewane added.
Read also: Borrowing cost seen moderating as monthly inflation slows by 50%
Nigeria’s headline Consumer Price Index (CPI) reached 34.19 percent, up from 33.95 percent in May, reflecting a 0.71 percent increase. On a month-to-month basis, the headline inflation rate for June 2024 was 2.31 percent increase, which is 0.17 percent higher than the 2.14 percent recorded in May 2024.
The committee expects headline inflation to ease in the near future due to the tight monetary policy environment and previous rate hikes.
As for the implications, analysts at FBNQuest said Nigerian banks are likely to continue benefiting from the high interest rate environment, with widened net interest spreads resulting from repriced loans.
In the equities market, “we anticipate a shift of assets from equities to fixed-income securities, as investors seek higher yields from fixed-income investments,” the analysts said.
