By Babajide Komolafe
This was one of the highlights of the Depository Corporation survey for February 2017 recently published by the Central Bank of Nigeria (CBN). Among other things, the survey revealed that total demand (current account) deposit of banks fell by 10.75 per cent to N8.6 trillion in February from N9.636 trillion in January. Similarly, currency outside the banks declined month-on-month (m-o-m) by 1.16 per cent to N1.61 trillion. Consequently, Narrow money supply declined m-o-m by 9.36 per cent (and 11.35 per cent year-to-date, y-t -d) to N10.21 trillion.
According to the report, broad money supply, M2, moderated month-on-month by 4.34 per cent to N22.37 trillion following a 0.46 per cent increase in Net Domestic Assets (NDA) to N13.82 trillion and an 11.21 per cent decline in Net Foreign Assets (NFA) to N8.55 trillion. The increase in NDA followed a 0.54 per cent m-o-m increase in Net domestic credit to N26.77 trillion which more than offset a 0.62 per cent increase in other liabilities (net) to N12.95 trillion.
Monetary policy stance
On asset creation, the public sector continued to crowd out the private sector as credit to the government increased m-o-m by 2.90 per cent to 4.41 trillion, outpacing the 0.09 per cent increase in credit to the private sector to 22.36 trillion. The mild growth in credit to the private sector may have also been informed by relatively high non-performing loans.
In February, the accommodative monetary policy stance remained in effect, reflected in the monthly decline in Reserve money by 1.61 per cent (and year-to-date by 5.06 per cent) to N5.54 trillion in the month of February as bank reserves decreased month-on-month by 2.28 per cent (year-to-date by 2.86 per cent) to N3.22 trillion while currency in circulation fell m-o-m by 0.79 per cent (and 9.19 per cent y-t-d) to N1.98 trillion.
*Forex sales, TBs rattle interbank money market
The interbank money market suffered bouts of intense scarcity of funds which sent up cost of funds to the roof following liquidity outflows to fund foreign exchange purchase and investment in treasury bills (TBs).
Analysis of TBs trading during the week showed that the CBN offered and sold N135 billion worth of Primary Market TBs comprising N28.1 billion worth of 91-Days bills, N23.7 billion worth of 182-Days bills, and N83.2 billion worth of 364-Days bills. While the 91-Days bills were under subscribed with total public subscription at N17.1 billion, the 182-Days and 364-Days bills were oversubscribed with total public subscription at N28.3 billion and N90.4 billion respectively. In addition to this, the CBN also sold $264.3 million in forwards and spot transactions as well as $500 million special intervention sales. As a result market liquidity, which closed last week at N21 billion dropped to minus N220 billion on Wednesday. This trend was however halted on Thursday and Friday, due to inflow of N264.3 billion from payment of matured TBs, and inflow of statutory allocation funds of N429 billion.
Reflecting the volatility of market liquidity, short terms cost of funds which closed the previous week at 16 per cent shot up to 100 per cent on Wednesday before crashing to 10 per cent at the close of business on Friday. In terms of the direction of cost of funds this week, analysts at Afrinvest Plc, a Lagos based investment firm noted that: “In the coming week, we expect money market rates to remain dictated by CBN’s sustained but unpredictable interventions in the currency market.”
However, analysts at Cowry Assets Management Plc, a Lagos based investment firm, predicted a moderation in cost of funds due to impact of the inflow of the statutory allocation funds. Naira to appreciate to N375/$: Financial sector operators have predicted that the interbank foreign exchange rate and the parallel market exchange rate will converge at N375 per dollar, implying further appreciation of the naira to N375 per dollar in the parallel market. According to Afrinvest Plc, “Our interactions with operators and other stakeholders in the market suggest to us that with rates converging towards the N375/1 retail intervention rate, the apex bank may be eyeing unified FX rates at N380.00/1-N370.00/$ before cutting intervention to give way for a well-functioning interbank market. Nonetheless, this remains unlikely in the interim given the absence of the political will and overarching implication of this on price-level and public welfare.”
This optimism followed last week’s appreciation of the naira to a 7-month high of N390 per dollar in the parallel market, in response to sustained dollar injection by the Central Bank of Nigeria (CBN). Parallel market exchange rate From N445 per dollar the previous week, the parallel market exchange rate dropped steadily throughout the week to close at N390 per dollar, indicating 12.4 per cent appreciation of the naira. The huge appreciation was triggered by combination of decline in dollar demand and further injection of dollars by the CBN. Bureaux De Change (BDC) operators told Vanguard there is little dollar demand in the market, while people who had hitherto horded dollar are offering them for sale to avoid further financial loss.
During the week, the CBN injected $264.3 million dollars comprising $181.3 million for 60 days forwards transaction and $83 million to meet customers demand for personal travel allowance, business travel allowance, school fees and other invisible transactions. The additional dollar sales came on heals of the CBN’s Governor’s vow that the apex would sustained its intervention in the foreign exchange market. Addressing the press after the Monetary Policy Committee (MPC) meeting on Tuesday, Emefiele warned that those doubting CBN’s ability to sustain the programme would be the losers as, according to him, the rates were already converging.
He said, “We have seen the foreign exchange rates now converging and we are strongly optimistic that the rates will converge further. “In terms of sustainability, it is important for us to state at this point that reserves are trending upwards, close to $31 billion and the fact that we have done this consistently up to four to five weeks should tell everybody or those who doubt the strength of the CBN to sustain this policy that we are able. “It remains for me to say that they are taking a risk and are on the wrong side of the bet, given the direction that we are coming from. There is a determination to see to the convergence of those rates. And with what we have seen so far, we are very optimistic that those rates will converge.”