The Central Bank of Nigeria (CBN) yesterday withdrew an estimated N1 trillion ($6.27 billion) from the banking system to reflect the increase in Cash Reserve Requirement (CRR) on public sector deposits as announced earlier, causing interbank lending rates to spike by seven percentage points from Tuesday’s close, but failing to lift the naira, dealers said.
The withdrawal of such huge amount impacted on lending rates in the interbank, which rose to around 19 per cent yesterday, up from around 12 per cent at Tuesday’s close, after the Central Bank debited lenders’ accounts to meet a hike in the CRR on public sector deposits to 50 per cent, from 12 per cent previously.
The apex bank had said it was imposing the new CRR requirement two weeks ago to tighten liquidity and support the naira.
However, the naira fell slightly against the dollar, closing at N160.10 to the dollar on the interbank market, weaker than the 159.65 to the dollar it closed at on the previous day.
Dealers said this was because banks had already sold their dollar positions to meet the new requirement ahead of yesterday’s withdrawal, so the impact had already been priced in.
“The Central Bank finally debited our accounts today, draining the market of liquidity and the overnight rate went up to 19 per cent,” one dealer said.
Traders said many lenders had already sold down liquid assets and dollars to replenish their cash balances in preparation for the withdrawal.
“The market had priced the effect of the huge cash withdrawal since the announcement two weeks ago, while fresh dollar demand and lack of dollar flows are expected to push down the value of the naira next week,” another dealer said.
Analysts say Nigeria will need to attract back foreign inflows for the Central Bank’s move to have a sustained positive effect on the naira.
Financial experts estimate that banks would lose no less than N45 billion in interest income following their inability to utilise 50 per cent of the deposits from the three tiers of government and their agencies.
The decision is expected to have a “negative impact on the banking sector,” Muyiwa Oni and Rele Adesina, analysts at SGB Securities Limited in Lagos, had written in a report following the announcement.
In the first quarter, “public sector funds in the banking sector stood at N2.5 trillion, which was 17 per cent of the banking sector’s deposits,” the analysts said.
“The CBN was concerned about the build-up in excess liquidity in the financial system and a vicious circle where banks sourced large amounts of public sector funds and subsequently lent them to the government by purchasing T-bills and Open Market Operations,” Samir Gadio, a London-based emerging-markets strategist at Standard Bank Group Ltd.
The newly-introduced reserve requirements “could also result in a sharp increase in Nigeria’s interbank rates,” which may impact some lenders’ net interest margins negatively because of the higher cost of funding, the analysts at SGB said.
Africa’s top oil producer is a growing destination for foreign investors, but it remains vulnerable to capital flight. Efforts to defend the naira have seen the foreign reserves reducing to $46.96 billion by end-July, from $48 billion in June.
On the bi-weekly foreign exchange auction, the central bank sold $248.45 million at 155.75 to the dollar, compared with $285 million sold at the same rate on Monday.
The bank has spent billions of dollars of foreign reserves over the past two months on keeping the naira within its target corridor of plus or minus 3 per cent around 155 to the dollar.
The secured Open Buy Back (OBB) rose to 18 per cent from 11.5 per cent on Friday, six percentage point higher than the Central Bank’s benchmark interest rate.
Overnight placement edged higher at 19 per cent from 11.5 per cent, while call money closed at 20 per cent, eight percentage points higher than the 12 per cent it closed on Friday.
Dealers expect interbank rates to rise further early next week after the market reopens from a 2-day Muslim holiday but should moderate toward the end of the week.