CBN withdraws N1trn from banking system

The Central Bank Of Nigeria (CBN) removed an estimated N1 trillion from the banking system on Wednesday, causing interbank lending rates to spike by 7 percentage points from Tuesday’s close, but failing to lift the naira.

Interbank lending rates rose to around 19 per cent, up from around 12 per cent at Tuesday’s close, after the apex bank debited banks accounts to meet a hike in the Cash Reserve Ratio (CRR) on public sector deposits to 50 per cent, from 12 per cent previously.

Also, the naira fell slightly against the dollar, closing at N160.10 to the dollar on the interbank market on Wednesday, weaker than the N159.65 to the dollar it closed at on the previous day.

Dealers said this was because banks had already sold their dollar positions to meet the new requirement ahead of Wednesday, so the impact had already been priced in, adding that banks had already sold down liquid assets and dollars to replenish their cash balances in preparation for the withdrawal.

“The central bank finally debited our accounts today, draining the market of liquidity and the overnight rate went up to 19 per cent. The market had priced the effect of the huge cash withdrawal since the announcement two weeks ago, while fresh dollar demand and lack of dollar flows are expected to push down the value of the naira next week,” one dealer said.

Analysts say Nigeria will need to attract back foreign inflows for the central bank’s move to have a sustained positive effect on the naira. Nigeria is a growing destination for foreign investors, but it remains vulnerable to capital flight.

On the bi-weekly foreign exchange auction, the central bank sold $248.45 million at 155.75 to the dollar, compared with $285 million sold at the same rate on Monday.