The 498 per dollar closing rate of the naira at the end of last week confirmed the assessment by foreign exchange traders and some industry experts that the naira would not cross the N500 to the dollar psychological watermark for the whole week at the parallel market.
This is even as the nation’s interbank lending rate dropped 6.5 percentage points on Friday to 5 percent on average as the money market became awash with cash from budgetary disbursal and coupon payment on matured bonds.
Despite the commencement of the sale of foreign exchange to Bureau de Change (BDC) operators by the Central Bank of Nigeria in the previous week, forex traders believed that the naira will trade slightly below 500 per the United States dollar throughout the week.
The naira had steadied at 498 to the dollar at the unofficial market in the last two weeks while hovering around 305.25 and 305.50 on the official interbank foreign exchange market last week.
Nothing changed at the BDC segment of the market, with Travelex, one of the IMTOs in the country, continual sales of about $20m to the 2,500 BDCs operators with each getting $8,000, the President, Association of Bureau De Change Operators, Alhaji Aminu Gwadabe, said.
However, the cost of borrowing among commercial lenders closed at 11.5 percent last week due to drop in liquidity in the market necessitated by bond and treasury bills sales.
Traders said around N400 billion was injected into the banking system on Wednesday from December budget allocations to states and local governments, while N49 billion coupon on matured bonds was released by the central bank on Friday, boosting liquidity and forcing down interbank rate.
On Thursday, the central bank withdrew around N217 billion through the sales of short-dated open market operations (OMO) bills in a bid to reduce the level of excess liquidity in the banking system, but market liquidity remained high.
Balance in commercial lenders’ accounts with the central bank stood at N254.46 billion surplus on Friday, against N202.58 billion in the previous week.
“We strongly believe that the central bank will conduct more OMO next week to take out the excess cash from the system,” one trader said, adding that expected dollar sales at a special forex auction could also help reduce the liquidity level and seen rate rising again.
The central bank had on Wednesday asked commercial lenders to submit backlog dollar demand from fuel importers, airlines, raw-materials producers, and makers of agricultural chemicals and machinery for manufacturers.
There are strong indications that the federal government is expected to issue no less than $1 billion in bonds in the coming months, while investors are already lining up to buy it up, despite the poor state of the economy.
With the sharp drop in the global oil prices, which has seriously affected Nigeria forex revenue due to its mono-economy status and being an import-dependent country, there is doubt about the naira currently facing serious pressure against the dollar, as well as its consequence on the budget shortfalls.
On the face of it, the $1 billion of bonds Nigeria hopes to sell by the end of March might seem unattractive, especially at a time sentiment towards African debt has dampened after Mozambique missed a coupon payment.
But investors hungry for higher returns in a low-interest rate environment reckon Nigeria’s benign debt levels, recovering foreign exchange reserves and a potential yield above seven per cent are reasons enough to look beyond the country’s economic woes.
Nigeria’s Eurobond has been a long time coming. A year ago, Nigeria appeared to have shelved the idea in favour of a loan from China, but it embarked on an investor road show for the bond late last year in the United States and Britain.
The last time Nigeria issued dollar-denominated bonds in July 2013, oil was comfortably above $100 a barrel but the slump in prices from $115 in June 2014 to just $28 a barrel by January 2016 has hurt the country’s economy.
According to the World Bank, Nigeria’s economy probably shrank 1.7 percent in 2016, underperforming at an average growth rate of 1.5 percent across sub-Saharan Africa and way behind high-flying economies such as Ivory Coast.