The nation’s currency, the naira, is expected to experience further pressure, as the liquidity position worsens with the Asset Management Corporation of Nigeria (AMCON) set to inject N866 billion into the system through repayment of maturing obligations, BusinessDay investigations have shown.
The implication of the injection of the huge sums by AMCON, is that the foreign exchange market will experience further volatility, as well as the addition of idle funds in the coffers of the banks.
The situation is aggravated by the continued depletion of the nation’s foreign reserves, occasioned by the Central Bank of Nigeria’s (CBN’s) determination to defend the naira by all means.
For instance, the naira traded lower against the greenback on Thursday, to a mid price of N165.40/$, at the interbank, bringing it to 2.9 percent weaker this year.
The situation is capable of widening the gap between the official market at N155.45/$ as it is expected to depreciate further from the current rate, to between N168/N170, a development that will encourage roundtripping.
Another threat is the likelihood of increase in the inflation rate, with the consequence of further eroding the purchasing power of Nigerians. Nigeria’s consumer inflation for September rose to 8.3 percent, according to the National Bureau of Statistics, (NBS).
Nigeria’s foreign-exchange reserves have declined 13 percent this year, to $39.3 billion as at October 27 as the CBN sold dollars to prop up the naira, and as oil production missed estimates.
The injection of AMCON funds topped discussions at the last meeting of the Monetary Policy Committee of the CBN, with members calling for extra means of curtailing the surge in liquidity, as well as calling on the CBN to make the rate at the standing deposit facility, currently at 10 percent, less attractive.
This, according to them, will encourage banks to lend to critical sectors of the economy, rather that keeping the funds with the CBN.
According to Sarah Alade, deputy governor in charge of policy at the CBN, “The banking system liquidity continues to be high, suggesting that some measure is needed to rein in the excess liquidity.Banking system deposits at the CBN deposit lending facility have consistently been high, reaching N600 billion on some days, during the review period.
In addition, the anticipated AMCON injection of N866 billion into the economy at the end of October will also add substantial liquidity to system.”
Adelabu Adebayo, deputy governor, in charge of the corporate services directorate of the CBN, observed that “The last issue is the persistence of huge liquidity in the banking system, with the potential of exacerbating the pressure in the foreign exchange market.”
Suleman Barau, another member of the MPC said, “Liquidity ratio remains at 12% above the minimum prescribed ratio. In addition, a monitoring of the average daily balance at the Standing Deposit Facility (SDF) window remains a source for concern in the context of need to increase lending to the real sector. “The reasons for the sustained liquidity are not farfetched. Firstly, there has been the reluctance of banks to increase lending to the real sectors, given the attractive yield from investment in government securities and indeed from the SDF window.
“Secondly, even though the stance of policy has been tight for sometime in the recent past, liquidity injection from prior year QE by the CBN, following the global economic crises and subsequent creation/funding of the Asset Management Corporation (AMCON) is still substantially out there.”
Abdul-Ganiyu Garba, a member of the monetary policy committee, covering monetary and fiscal policy, also contributing said, “The impacts of maturing AMCON Bonds in the fourth quarter (October, 2014) on liquidity demand proactive actions to sterilise inverted intermediation liquidity.
“It is clear to me that the Standing Deposit Facility (SDF), government securities and currency substitution are weakening market functioning.
“There are genuine fears that the high liquidity levels of banks may worsen with the anticipated redemption of AMCON bonds in October 2014.
“There are genuine fears that the high liquidity levels of banks may worsen with the anticipated redemption of AMCON bonds in October 2014. It is my candid opinion that the CBN can and should, through several other means at its disposal, encourage the deposit money banks to channel a good portion of their excess liquidity to the growth and employment generating sectors of the economy.”
Kingsley Moghalu, deputy governor in charge of financial system stability at the CBN, said, “In the face of gradually rising inflation and excess liquidity pressures, with staff estimates pointing to inflation ticking up in the next six months, owing to anticipated growth in reserve money and accelerated food inflation, the imminent injection of over N800 billion liquidity into the financial system through the October 2014 bond, the redemption by the Asset Management Corporation of Nigeria appears to make further tightening imperative.”
Adedoyin Salami, associate professor at the Lagos Business School, observed that the “The growing level of liquidity will be exacerbated by the imminent redemption of a further tranche of AMCON Bonds.”
Indeed, Godwin Emefiele observed that ”The situation is expected to be complicated by the redemption of AMCON bonds to the tune of about N0.9 trillion by end –October.”
Bismarck Rewane in the current Economic and Business Update said that “The naira has remained under consistent pressure since the price of oil started its precipitous fall. Only a few analysts had forecast that oil price would go below $100 per barrel.”