FAAC Funds’ Injection Lowers Interbank Rates

Minister  of Finance, Ngozi Okonjo Iweala

By Obinna Chima

The cost of funds amongst commercial banks in the country dropped significantly to an average of 11.8 per cent on Friday as against the 15.23 per cent it stood the preceding Friday.

This was largely attributed to the inflow of funds, disbursed among the three tiers of government by the Federation Account Allocation Committee (FAAC) the preceding week.
The Minister of State for Finance, Alhaji Yerima Ngama, had revealed that FAAC distributed a total of N575.46 billion to the three tiers of government as allocation for the month of January 2013.

Traditionally, part of FAAC funds that passes through the financial system, helps in improving the liquidity position of the market.
As a result of this, data made available by the Financial Market Dealers Association (FMDA), showed that while the overnight (call) tenor dropped to 10.25 per cent on Friday, from 14.33 per cent the preceding Friday, the 7-day tenor also fell significantly to 10.75 per cent on Friday, as against the 14.58 per cent it stood the preceding Friday.

Similarly, just as the 30-day tenor plummeted to 11.42 per cent on Friday, from 14.87 per cent the preceding Friday, the 60-day tenor also reduced to 11.79 per cent, from 15.25 per cent the preceding Friday.

Interbank markets generally are the private lender-of-last-resort for banks' short-term liquidity needs. Therefore, lack of adequate liquidity flow through the market has the potential to substantially impair the market as well as the economy.

Forex Market
The naira maintained its value against the United States dollar at the Wholesale Dutch Auction System (WDAS) of the Central Bank of Nigeria (CBN) last week as it closed at N155.74 to a dollar, same as the preceding week.

The apex bank however offered a total of $240 million to dealers last week, representing a decrease by $60 million, compared to the $300 million offered the preceding week. This mirrored the reducing appetite for the greenback at the official market. But at the interbank segment of the forex market, the naira appreciated marginally by 2 kobo to close at N157.38 to a dollar on Friday, as against the N157.40 to a dollar it attained the preceding Friday.

The Africa Economist/Managing Director, Economic and Market Analysis, Citibank, Mr. David Cowan, had predicted that the naira would be stable this year. But the economist argued that the local currency might come under pressure next year.

“By the time we get to 2014, which is a pre-election year, the fiscal consolidation which has been achieved is going to come under some pressure. I think we might see some changes in the management of the central bank which I think may stall some confidence in the system.

“If you look at Nigeria’s growth story, what you see is that oil production is stagnated, but the rest of the economy has been growing quite faster. What that does is that it drives the increase demand for forex,” he said.

Monetary Policy Rate
Cowan also advised the Central Bank of Nigeria (CBN) to be careful in lowering the Monetary Policy Rate (MPR). According to Cowan, sending a signal that the restrictive monetary policy regime was over might put pressure on the naira.

He said having attracted a lot of inflow into the country as a result of its tight monetary policy stance, the central bank must be careful in relaxing interest rate so as not to hurt the economy.

Cowan explained: “The problem is that when you increase interest rate and it attracts inflow. But when you want to ease rate, it is quite problematic.

“Nigeria’s high interest rate has attracted a large amount of inflow into the country and those funds may want to leave at some point. How you manage that without putting your currency under pressure is what is complicated.”

House of Representatives on MPR
The House of Representatives last week mandated its Committee on Banking and Currency to liaise with CBN to consider the possibility of reducing the MPR to single digit. The lawmakers argued that a single-digit MPR would encourage the growth of small-scale businesses, expand the manufacturing industry and attract more foreign investors to Nigeria.

In adopting a motion sponsored on the issue by Hon. Nadu Karibo, the House noted that the MPR of any country determined the rate at which banks access funds and the rate at which they also lend money to businesses and investors.
He observed that with the current MPR at 12 per cent, Nigeria ranked among the countries with very high interest rates in the world.

Bankers’ Committee
The CBN Governor, Mallam Sanusi Lamido, last week disclosed that the Bankers’ Committee was currently working with the Nigerian Communications Commission (NCC) and other service providers to ensure that some of the challenges of cashless policy are addressed. The CBN governor expressed satisfaction with the level of progress made on the cashless policy.

“The numbers done in terms of points of sale (PoS), automated teller machines (ATMs) are very remarkable”. We started last year with 5000 PoS machines, we ended year with 165,000 PoS machines. Mobile banking for example, in January was doing N4 million per month, by December last year, it went up to N8 billion. It is moving up and we hope it continues,” he added.
Sanusi stressed that some of the challenges confronted by the policy were about telecommunications.

Capital Adequacy
As part of efforts to entrench risk management in banks, the CBN last week said it had reviewed the risk weights assigned to some identified exposures in the industry. The banking sector watchdog insisted that breaches of the industry’s single obligor limit would be regarded as impairment to capital.

It explained that the risk weight assigned to direct lending to local governments, states, ministries, departments and agencies (MDAs) has been increased from 100 per cent to 200 per cent. It also stated that investments in Federal Government of Nigeria Bonds should continue to attract zero per cent risk weight, adding that state government bonds that meet the eligibility criteria set out in the Guidelines for Granting Liquidity Status for State Government Bonds would continue to be risk weighted at 20 per cent.

Inflation
Nigeria’s composite consumer price index (CPI) which measures the rate of inflation last week dropped by 300 basis points to nine per cent year-on-year in January from 12 per cent in December 2012. The core inflation index also decreased to 11.3 per cent from 13.7 per cent in the previous month.

The National Bureau of Statistics (NBS) attributed the 25 per cent drop in CPI to base effects including lower food prices.
“These are as a result of higher price levels in the previous year, which imply that the year-on-year changes exhibited this year will be muted. In particular, the Nigerian economy exhibited several shocks in January 2012.

“The partial repeal of the premium motor spirit (Petrol) subsidy led to increases in transportation costs as well as secondary effects, as the transportation costs affected both food and non-food prices,” it explained.

Economic Forecast
The NBS also projected real gross domestic product (GDP) growth rate of 6.75 per cent for the Nigerian economy in 2013 and an average rate of 6.9 per cent over the period of 2013-2016.

The bureau which had estimated a 6.61 per cent growth in Real GDP for 2012, had said that the latest prediction was based on the assumptions that the CBN would continue to promote moderate monetary policy. It also projected that inflation rate of about 9.8 per cent on the average throughout the year.

It said growth in 2013 would be aided largely by current structural reforms including reforms in agriculture among others.
“This forecast appears to mirror a consistent growth pattern (when compared to previous statistics) for the Nigerian economy taking cognisance of evident realities in the macroeconomic environment in addition to the gradually improving productive base of the economy,” it added.