Excess liquidity in the banking system rose to about N1.24 trillion last weekend following huge backlog of unmet foreign exchange demand for which the Central Bank of Nigeria, CBN, returned the Naira back-up funds to the banks on Friday.
There is an indication that the liquidity overflow will reach an all time high of N1.5 trillion by end of this week, following the maturity of Treasury Bills worth N257.9 billion, which will be credited to the banks by CBN.
This is expected to see interbank money rates trending at very low levels with further erosion of margins and yields in money market instruments. However, financial analysts expect CBN to mop up the unprecedented liquidity overflow with re-issue of Treasury Bills at a predetermined volume to match the desired liquidity level.
Though the liquidity level is expected to go down by at least N800 billion on Wednesday following banks’ cash back-up for foreign exchange bid, analysts also indicated that there would be further spike in liquidity as more cash refund is expected to be credited to banks representing Naira value of the unmet foreign exchange demand.
Last week the money market opened at a liquidity level of N1.1 trillion following the refund of over N700 billion foreign exchange cash back-up the previous weekend even after the apex bank had held back N142.4 billion worth of maturing Treasury Bills. In the last six months, CBN’s monetary measures had created conditions for high liquidity in the banking system so as to force the banks to push their excess liquidity into real sector funding and general stimulation of economic activities.
The apex bank had hoped that the resultant low interbank interest rate and yields on its treasury instruments would discourage banks from investing all their cash balances in the treasury instruments. But the measures have not yielded the expected results as banks still feel it was safer to invest in the treasury instruments which are secured than to risk losing their money in a higher yield loans which have higher risk of losses to bad business.
While the treasury instruments attracted less than 5.0 per cent yield, interest rates on prime lending to blue chip businesses hovered around 15 per cent with other business loans as high as 30 per cent. Financial analysts at Afrinvest Group said: “Barring any Treasury Bills auction at the Open Market Operation, OMO, we expect the interbank market to stay liquid as market opens this week but contract by mid-week as banks make provisions for foreign exchange auction. However, we expect rates to trend lower from Thursday due to expected inflow of N257.9 billion from maturing OMO bills on Thursday and foreign exchange intervention refunds.” Vanguard
