Banks amass N1.1trillion war chest for new forex bidding

Banks amass N1.1trillion war chest for new forex bidding

Ahead of the take off of the new foreign exchange market regime  tomorrow, the banking industry has entered a battle of wits and strategy, with some banks amassing cash for foreign exchange bids , while the Central Bank of Nigeria, CBN, has stepped-in to forestall the impact of such move on the exchange rate.

CBN had announced a flexible and market driven exchange system last Wednesday, indicating that dealers and buyers of foreign exchange can now access as much forex resources as they can afford but at whatever price is determined by the market forces.

To cover their positions and meet their customers’ forex requirements, banks needed a lot more of Naira back-up as the exchange rate is expected to rise significantly.

Consequently, banking industry liquidity surged to about N1.06 trillion – over 382.5 per cent higher than the week’s opening figure of N219.7 billion – indicating that N840.3 billion excess cash has been added to the outstanding liquidity in the system.

Out of this N840.3 billion, only the N152 billion maturing treasury bills fund credited the banks by CBN on Wednesday could easily be connected to funds for other services.

Money market dealers told Sunday Vanguard that the bulk of the balance of N688.3 billion were made up of new funds raised for the new forex regime as well as the excess forex bid lodged with CBN the previous week, under the now phased-out weekly forex intervention.

The apex bank refunded the excess last week which has now been lined up for the forex bid in the new regime  tomorrow.

Also, the dealers said there was significant rise in banks’ borrowings from the CBN Standing Lending Facility, apparently to shore-up their Naira back-up for forex requirements.

With the huge amount as  at Friday morning, the CBN, Sunday Vanguard learnt, was uncomfortable with the likely impact on the exchange rate, when too much money would be chasing the limited foreign exchange resources in a new regime of full, free market forces.

Consequently, the apex bank mopped up about N205.9 billion from the system later in the day on Friday, bringing to N434.9 billion the total cash squeezed out from the system, having rolled over N229 billion worth of matured treasury bills the previous day.

Money market dealers said the mop ups are expected to have a moderating impact on the exchange rate spike at the opening of the new forex market  tomorrow.

CBN had estimated the exchange rate under the new forex market at between N260 – N270/ USD1.00, as against N199 under its controlled regime phased out last weekend.

Analysts said though the N270/USD1.00 shows a massive N71 or 35.7 per cent depreciation of the local currency, the apex bank would have it as tolerable limit against a possible spike to N300/USD1.00, about 50 per cent depreciation, due to too much Naira cash chasing the limited foreign currency in a free market.

In fact, some analysts’ opinion monitored since the new forex regime was announced on Tuesday, suggested that the exchange rate could open at any price within N250 and N370 indicative of the type of uncertainty currently existing in the minds of most people, including bankers.

Earlier last week, Naira traded as low as N370.00/USD1.00 at the parallel market but appreciated to N355.00/USD1.00 on Friday.

Market rate for the local unit is expected to be determined in the week ahead as the new forex policy framework becomes operational on Monday.

According to analysts at Afrinvest West Africa, a Lagos based investment house, “interbank market rate is expected to spike whilst parallel market rate is likely to converge towards the interbank rate on increased supply”.

But they also noted the concluding remark of the CBN governor, Mr. Godwin Emefiele, that market participants should “be calm, no need to worry, everything is fine.”