By Emele Onu, 06.06.2010 

The Central Bank of Nigeria (CBN) has moved to deal with demand pressure that rose recently at the foreign exchange market.  With the economy showing signs of recuperation, there was a leap on importation necessitating a sudden rise in the demand for foreign exchange.  Besides, analysts said some fiscal and macroeconomic conditions were not favourable to sustained appreciable value for the naira. 

The managing director, Economic Associates, Dr Ayo Teriba said, there is the tendency for the local currency to lose value owing to the combined effect of excess liquidity, low interest rates and fall in oil prices.A treasurer with one of the banks explained the precarious market condition to THISDAY. “Demand is increasing at the WDAS as a result of increased liquidity problems of banks and causing the naira to depreciate. Recent pronouncement of the Ministry of Finance as par changes of budget benchmark and the strengthening in dollar, which is causing a decline in oil price internationally, are factors working against the local currency,” he said.

Traders said there was a relieve to the naira last week as the CBN at last Wednesday's auction offered $500mlioon, with $304million demanded - resulting in a subscription of 60.80 per cent. The CBN sold a total of $304 million to dealer banks. There was no auction last Monday owing to the Democracy Day holiday. The value of the naira appreciated at both the inter-bank and official segments of the market, but was stable at the parallel market segment.In response to the tension at the market the previous week, the CBN at one of its auctions sold $360 million to banks. It offered $450 million for sale at the auction compared to $350.8 million that was demanded, a development dealers said occur rarely. 

“The situation where supply exceeds demand is not common. That situation was about the only case in the past two months and that was a response by the CBN to defend the naira,” THISDAY was further told.Dollar sales by the CBN at the WDAS, about three weeks ago also manifested the pressure on the forex market as demand for dollars climbed from the region of $500 million to about $1 billion. Before then, the CBN used to fund the market by just about $250million on any auction day and $500 million weekly.

With the expectations that the forex pressure will further ease this week, dealers anticipate stability in the market.On the inter-bank market where banks borrow from one another to meet their immediate monetary needs, the rates remained low but changed marginally by factors especially the moderating effect of Federation Account Allocation Committee (FAAC) allocations.

Forex Transactions

Details for foreign exchange market transactions last week indicated that CBN offered $500million last Wednesday, (the only auction for the week owing to the Monday public holiday, the amount demanded was $304million, resulting in a subscription of 60.80 per cent. The CBN sold a total of $304million. It was gathered that the value of the Naira appreciated at both the inter-bank and official segments of the foreign exchange market, but was stable at the parallel market segment. 
The Naira appreciated at the inter-bank and official segments by 25 kobo and 9 kobo, to close at N151.22 to a dollar and N148.78 to a dollar, from the previous week's figures of N151.47/$1 and N148.78/$1 respectively. At the parallel market, the Naira was stable at N153.50 to one dollar.

As stated earlier, the pressure witnessed at the foreign exchange market the previous week, eased last week. THISDAY gathered that with the economy showing signs of recuperation, there was a leap on importation culminating into a rise in the demand for foreign exchange. Besides, analysts said some fiscal and macroeconomic conditions were not favourable to sustained appreciable value for the naira.It was feared that the surging forex demand might affect the country's reserves with the fall in oil price at the international market, which is capable of affecting CBN's capacity to continue to fund the market adequately. 

The price of crude oil at the international market has slumped 10 per cent this year and currently trading below $70 a barrel. The reserves dropped to N38.70 billion as at last Friday from $42.40 billion at the end of 2009. The monetary authority uses reserves to defend the value of the naira. Nigeria lawmakers are planning to lower the benchmark oil price adopted in this year's budget to $57 per barrel from $67 per barrel that was signed into law. Sanusi said recently that assumptions on the country's forex earnings are unrealistic especially the $67 a barrel benchmark.The decision to revise the budget is affecting the naira,” said an official of one of the dealer banks.  

Interest, Lending, Interbank Transactions 

According to FSDH Research, the inter-bank rates dipped marginally because of about N60.25 billion Treasury Bill (TB) maturity that hit the system and the continued moderating effect of the N415.16billion that hit the system from the FAAC allocation for the month of May in the previous week. 

Data showed that the 7-day NIBOR closed the week at 2.08 per cent, a 48 basis point decrease from the previous week's figure of 2.50 per cent, while the 90-day NIBOR closed the week at 7.28 per cent, a 1 basis point decrease from the previous week's figure of 7.29 per cent. There was no activity at the 91-day and 182-day Treasury Bills (TB) auction market. However, at the 364-day TB auction, the CBN re-paid a total of N30billion. At the secondary segment of the government securities market, a total of N30.25billion worth of maturity was repaid by the CBN into the system.

Market operators however, said inter-bank rates would not remain at historical lows. “The reason is that banks have commenced a number of activities that require funding, which in itself means pricing financial assets higher,” a trader with one of the banks said.Interest rates on savings and overnight accounts, which hit the zero point in some banks only recently has merely rose to between 2 and 4 per cent in some banks. But lending rate as published by banks is between 17 and 18 per cent. 

Analysts said about N35billion worth of maturities will hit the system this week. “This should maintain relative liquidity in the system. However, the CBN plans to withdraw about N100 billion from the system via Open Market Operations (OMO) this week, which may bring about pressure on the inter-bank rates, but rates are expected to remain relatively stable,” said FSDH. There were other developments last week that could affect the market trend from the near to medium-term.

Agriculture Credit Facility

The CBN Governor noted last week that out of the about N200 billion earmarked to be disbursed as agricultural loans to farmers in the country, only N60billion have been utilised two years after.The CBN had in the first quarter of last year created N200 billion Commercial Agricultural Credit Scheme (CACS), in collaboration with the Federal Government. Despite the increase in the number of the participating banks from two to five, many of the target beneficiaries could not access the fund for various reasons including bureaucracy and their inability to meet the conditions of the individual banks.

Sanusi said agriculture was 42 per cent of the Gross Domestic Product (GDP) of the country and if the sector had just 20 per cent increase in the GDP, it would have improved the country's GDP considerably higher than at any point in the last 10 years.He said for there to be a sustainable development, there must be focus on the value chain that agriculture creates in the economy.

AMCON Bill's Assent 

The Asset Management Corporation of Nigeria (AMCON) Bill, is currently awaiting presidential assent to become law.The bill had been passed separately by the two houses of the legislature. Reuters quoted the CBN Governor, Sanusi Lamido Sanusi, as saying at a CNBC Africa television programme last weekend that the preparations to float the company are on.As part of the preparations, the CBN has set up a technical team to value bad bank loans that will be purchased by the AMCON.

“The central bank and finance ministry are making final preparations for the creation of AMCON, which will buy up non-performing loans in exchange for government bonds in order to free up banks' balance sheets,” said Sanusi.The Governor said: "We are looking at the toxic assets, we are looking at the value of the collateral, we are working on valuation models." With bad loans off banks' books, the CBN hopes financial institutions will resume lending to businesses, where credit has been tight since last year's $4 billion bail-out of nine weak banks.The CBN wants new investors to invest in the rescued banks but analysts said investors were not likely to do so until after the AMCON purchases the bad loans of the banks.

Aviation Sector's Intervention Fund

The CBN also announced last week, it is providing financial assistance to airlines to end the crisis rocking the aviation sector. It said it is including airlines on the list of target beneficiaries for the N500 billion intervention fund.According to the CBN, it has decided that the airlines can now partake from the fund so that those that are indebted to the banks can refinance their loans and amortize them over a period of 10 to 15 years.

The banks have recently battled a number of airlines over huge non-performing loans, with some of the banks going to arbitration or the law courts for the winding up of the airlines or any other processes that will permit the recovery of the loans.CBN said the decision to bail out the airlines was based on the fact that most of them are heavily indebted to banks in particular and by extension the banking sector, adding that the fund will assist to prop up the demand side to facilitate continued economic growth.

(Source:ThisDay)