Why Naira Is Under Pressure

Like human needs which are insatiable, the needs of end-users of foreign exchange have increasingly become insatiable. Matters are made worse with the Central Bank of Nigeria (CBN) constrained by the absence of a deep wallet.

The result is that the central bank watches helplessly as the naira continues to take a plunge every week because of its weak foreign reserves position. The fact that year 2012 looks uncertain with the likelihood of reduced demand for crude oil in the international market, occasioned by the debt crisis in Europe and America is making  the apex bank even more cautious in dipping its hand into the shallow foreign reserves.

The central bank offered $1.68 billion and sold $1.76 billion against the $3.05 billion demanded by the market in the month of November. In the corresponding month in 2010, CBN sold $1.58 billion.

According to the Financial Market Dealers Association of Nigeria (FMDA) in its monthly report for November, findings showed that the observed drop was deliberate and intended to manage exchange rate volatility and ensure price stability against the backdrop of the global economic crisis. The dollar liquidity from the autonomous sources was said to be in the range of $1.00 – 1.75 billion.

With  expectation of a slowdown in the global oil demand as a result of the downturn in global economic growth and the possible impact on the domestic economy in terms of shocks, and volatility in assets prices and foreign exchange rate, the Central Bank of Nigeria took a couple of decisions at its MPC meeting to ensure price and exchange rate stability. Of importance, was the decision to adjust the midpoint of the target of official exchange rate from N150/$ to N155/$ and still maintained the band of +/- three per cent. What this means, was that the naira could now trade/exchange within a range of $1/ N155.00-N160.00.

The immediate effect of the MPC decision across the market segments was relative calmness as naira firmed up considerably at the CBN window  – Wholesale Dutch Auction System (WDAS) against the dollar early in the month, but later slid to$1/ N156 -7 mid-November, but still within the new range of between N155.00 and N160.00 to the dollar. In the month under review, Naira/Dollar relationship opened at $1/ N150.290 and closed at $1/ N156.310 representing a loss of N6.02 or 4.00 per cent at the CBN window (WDAS).

Trading at the inter-bank market opened at N160/$, moderated around $1/ N156 – 158.00 and closed at $1/ N161.00 in November. Naira/Dollar relationship at the BDC/Parallel market opened at $1/ N161.00 at the BDC/Parallel market, it traded mid-month at $1/ N160-162.00 and closed the month at $1/ N162.00.
The observed slid in the value of naira against the dollar in the month of November could be adduced to the quantum of foreign exchange sold at the WDAS window.

The premium between CBN and Parallel market as at month-end November was N5.69 representing 3.64 per cent. The month-end figure is less than the IMF benchmark of 5.00 per cent, but market sentiments favour further depreciation of the naira, and still give room for speculation and panic buying in the market.

Nigeria Inter-Bank Offer Rate (NIBOR)
Though the monetary policy indices remained unchanged at the last MPC meeting held in the month, the outcome of the October 10, 2011 extraordinary MPC meeting kept reverberating in the market. It would be recalled that the extraordinary MPC meeting in October raised Monetary Policy Ratio (MPR) to 12.00 per cent, maintained the current symmetric corridor of +/- 200 basis points (bpts), increased Cash Reserve Ratio (CRR) from 4.0 per cent to 8.0 per cent, and reduced the Net Open Position Limit from 5.0 per cent to 1.0 per cent of shareholders’ funds. All of these were done to address the unusual developments in the global and domestic economy, with potential negative impact on the domestic liquidity condition following renewed threats to price and exchange rate stability.

The immediate effect was market illiquidity occasioned by the aggressive mop up through Nigerian Treasury Bills sale at the Open Market Operations and the Primary Market Auctions. The market reacted proportionately as rates went up gradually to signal increase in assets prices and cost of funds in the market.

Unexpectedly, the injection from Federation Account Allocation Committee (FAAC) in October that should create liquidity and impact the month of November was delayed as rates soared in the first few days of the month. Rates opened and closed the first week on a weekly average of 17.0417 per cent for Call and 17.3750 per cent for seven days money as a result of the illiquidity from the previous month (October). It moderated downward in response to liquidity injection from FAAC for October – delayed as a result of some differences at the FAAC meeting.

It impacted rates behaviour in the second week of November, as rates shed 300-400 basis points to record a weekly average of 13.88897 per cent for Call and 14.4028 per cent for seven days money.

Rates further went up in the subsequent weeks in swift response to the aggressive mop up by CBN through the PMA and OMO window vis-a vis the WDAS window as rates oscillated to 16.9333 per cent Call/Overnight and 17.3333 per cent for seven days money in the third week, and closed the month on average of 17.1111 per cent for Call/Overnight and seven days money,

The month recorded total outflows of N1.28 trillion – foreign exchange funding of N550 billion – autonomous sources inclusive; Bond auction N65.00 billion and Treasury bills auction of N666.73bn against the total inflows of N870.91 billion through FAAC, matured bills, Excess Crude Account funds and Repo.

Deposit Takings and Lending Rates of Banks
In tandem with the changes in the monetary policy indices, rates of deposit and lending in the month further went up to a monthly average of 2.3119 per cent for saving, against 2.3050 per cent in the previous month. On the lending leg, rates for the prime structured loan closed at monthly average of 18.0476 per cent; while the normal structured loan averaged 20.7143 per cent from 20.5095 per cent recorded in the previous month.

Treasury Bills (PMA)
Still sceptical and uncertain about the inflationary outlook in the near term, the Central Bank of Nigeria upheld its contractionary monetary policy stance, but was less aggressive, when compared with the previous month. It mopped up N666.81 billion as against N881.64 billion sold in October 2011. There were activities in both the Primary Market Auction and Open Market Operations in the month. In the previous months, the Central Bank of Nigeria had sold N205.55 billion bills in January, N216.92 billion in February, N248.05 billion in March, N215.06 billion in April 2011, N204.61 billion in May and N365.70 billion in June and N307.52 billion in July 2011.

At the first auction in November, 91 days, 182 days and 364 days bills were allotted at 15.000 per cent, 16.200 per cent and 16.340 per cent respectively against 15.000 per cent, 16.000 per cent and 16.4900 per cent respectively in October.
Allotment of 91 days and 182 days at the second auction was done at 13.900 per cent, 15.100 per cent and 15.490 per cent respectively against 15.290 per cent, 16.290 per cent and 16.490 per cent in October 2011.

At the Open Market Operations, the Central Bank of Nigeria sold N342.72 billion against N465.38 billion in October. Previously, it sold N170.99 billion in September, N432.71bn in August and N97.78 billion in July 2011.

Subscription recorded in the month was N1.5 trillion against N1.11 trillion in October 2011. In the previous months, subscriptions were N856.37 billion in September, N857.71 billion in August, N716.70 billion recorded in July, N754.90 billion in June, N645.99 billion in May, and N518.014 billion in April 2011.

In terms of inflows to the system, the month recorded N227.93 billion as matured bills against N207.01 billion in October 2011.

Activities in the two-way quote (2WQ) Nigerian Treasury Bills market was mixed and largely driven by the changes in the monetary policy rate and the marginal rates at the primary market auctions and Open Market Operations in the month. Impacts of the 275 basis points increase in the MPR was significant in the 2WQ Treasury Bills market as yields responded proportionately to the changes, as operators tried to cover short position.

The true yield analysis of Nigerian Treasury Bills captured as NITTY further reflected the market activities of the instrument in the month.

FGN Bonds
The market recorded another re-opening in the month as the Debt Management Office (DMO) raised N65.00 billion in 10.70 per cent FGN May 2018 maturity. The original tenor was 10 years, but currently trades as 7years benchmark with term to maturity of 6 years, 6 months. Also reopened was 7.00 per cent FGN October 2019 – original tenor was 10 years, but currently trading as eight years benchmark with term to maturity of seven years 11month.

The reopening of the 10.70 per cent FGN MAY 2018 maturity attracted public subscription of N73.99 billion and allotment of N35.00 billion was among 67 successful bids at a marginal rate of 16.500 percent, while the 7.00 percent FGN October 2019 maturity attracted public subscription of N83.73 billion. The allotment of N30.00 billion was done among 28 successful bids at a stop rate of 16.500 percent.

The range of bids was 14.9600 percent – 23.0743 percent.

Total market subscription in the month was N157.72 billion against N124.77 billion in October, N183.16 billion in September, N130.43 billion in August and N157.98 billion in July 2011.

BLESSING ANARO / Leadership Newspaper