For the second day in a week, Interbank money market was halted Wednesday over the Central Bank of Nigeria (CBN) directives to Deposit Money Banks (DMB) to provide cash backing for foreign exchange purchases at its proposed intervention.
Trading on the interbank market was halted Tuesday on banks’ compliance with government directive that revenues from agencies be moved into the Treasury Single Account (TSA) with the apex bank.
President Muhammadu Buhari had ordered that all revenues be paid into the TSA from last Tuesday, as part of a drive to fight corruption and aid transparency.
Reuters quoted a dealer as saying, “The market is not trading yet. What we have is an indicative rate from some banks because of the instruction from the central bank to provide funding for forex intervention.
“We only have people quoting about 50 per cent as indicative rate for overnight placement,” another dealer said.
The apex bank in August directed commercial banks to pay for their dollar purchases 48 hours in advance, in a bid to curb speculations at the forex market and drain liquidity from the banking system.
Dealers said there was minimal trading in the interbank money market at 20 per cent for overnight lending on Tuesday, after the CBN released a market figure showing N486 billion in cash balances for commercial lenders.
The Chief Executive Officer of Financial Derivatives Company Limited (FDC), Bismarck Rewane, predicted that JP Morgan’s announcement last week that it will phase out Nigeria from its Emerging Market Government Bond Index (GBI-EM) by the end of October would trigger more naira volatility.
He said: “With the battle to stay on the index having been lost, there is less urgency to devalue the currency and remove forex restrictions. Further forex restrictions may even be imposed in the near term, as the CBN tries to conserve foreign reserves.
Nevertheless, we believe a devaluation has become even more imminent considering the need to boost investor confidence in an economy heavily reliant on dwindling oil revenues.”
Indeed, 24 hours after the JPMorgan action, the CBN reduced the time limit for funding currency purchases to 24 hours from 48 hours as part of efforts to stem the surge in demand for dollars.
Reuters reported the Head of Research at Afrinvest, Ayodeji Ebo, as saying that investors were increasingly concerned over whether the $31.5 billion in foreign reserves was enough to allow the bank to meet rising dollar demand.
“The central bank’s ability to defend the naira may be hampered hence a devaluation may be inevitable. Foreign investors exposed to Nigerian equities will prefer to exit positions ahead of any official devaluation,” Ebo of Afrinvest said.
“The parallel market exchange rate, which stabilised somewhat in recent weeks as the central bank provided dollar liquidity to some outlets, could well depreciate on increased forex demand stemming from heightened risk and investor concern,” NKC African Economics said in a research note.
In a related development, CBN data yesterday showed that Nigeria’s foreign exchange reserves fell 2.97 per cent to $30.69 billion by September 14, from $31.63 billion a month earlier. Compared with a year earlier, the reserves were down 22.42 per cent.
The apex bank has used the reserves to support the local currency, selling dollars to bureau de change operators twice weekly in a bid to narrow the gap between the official and unofficial exchange rate.
Reserves picked up shortly after President Mohammadu Buhari took office in May, which was attributed to efforts to plug leakage and demand management by the CBN.