The CBN Attempts to Enhance Liquidity Through The Mobilization of Idle USD Balances

- By Chinedu Okoye 



Summary:

- The Central Bank of Nigeria (CBN) has implemented several policy measures to boost FX supply and liquidity, through a series of initiatives that has yielded partial results.

- The latest directive allows banks to trade uninvested FX deposits in domiciliary accounts could unlock additional liquidity while ensuring customers retain access to their funds and receive competitive interest rates.

- This strategy is aimed and building prior policies, in the quest to drive FX supply and stabilize the Naira by encouraging the efficient mobilization of idle FX balances into the FX market.




An Extra Push to Boost Liquidity:

In a bid to increase FX supply, the Central Bank of Nigeria (CBN) has enacted a series of policy measures to improve the flow and allocation efficiency of the Naira. These moves, outlined below, have so far been effective in increasing FX supply, with reserves having grown by nearly 20% year-to-date.

The Bank has now added an extra layer, which appears to be a follow-through policy aimed at injecting more liquidity into the foreign exchange market by allowing banks to trade uninvested and idle FX balances.

Below, we outline these measures, their intended or actual impacts, and our thoughts on the latest policy move to permit banks to trade with uninvested FX deposits in domiciliary accounts.



Breakdown of Prior FX Regulations and Policy Measures:

Prior measures to harmonize the markets and enhance FX inflows through formal channels have improved FX supply to banks but have not been sufficient to significantly increase liquidity given the high demand for FX. This has kept the Naira below the zero-equilibrium value some economists have projected at N1500/$1.

The measures include:

Formalization of IMTOs: By restructuring the operations of International Money Transfer Operators (IMTOs) to ensure compliance with set guidelines, the CBN has encouraged the use of official remittance channels. This has increased FX supply through the remmitance channel and made remittance flows more traceable.

Liberalizing FX Access for Remittances: By allowing USD transfers directly into domiciliary accounts and limiting USD withdrawals from these accounts, the CBN has somewhat eased access to FX. Banks and customers can now use these funds for dollar transactions, increasing the available FX supply.

FGN USD Bonds: To further mobilize and inject locally domiciled FX and improve liquidity, the government issued $500 million in dollar-denominated bonds in August.

Cap on Service Imports: The CBN imposed a cap on certain service imports, such as tuition for Nigerian students in foreign institutions, to limit FX outflows.

FGN Disclosure Scheme: The Central Bank launched its 270-day (9-month) voluntary disclosure window in October. This scheme encourages individuals holding foreign currency to deposit these funds at banks with tax and confidentiality incentives, drawing more foreign currency into the financial system to boost FX supply.



Trading Idle Balances to Boost Liquidity:

To further improve liquidity and ease Naira pressure, the Bank introduced a new directive allowing banks to utilize the pooled deposits in domiciliary accounts. This incentivizes lenders and borrowers to inject idle balances into the economy.

The condition that the funds are not immediately invested and remain available to customers on demand instills confidence in the scheme and encourages prudent practices among banks. Customers will be compensated with interest payments on the "uninvested" domiciliary accounts, guided by standard industry interest rates.


Overview and Expectations: Rate Offerings and Spreads

Current interbank and customer rates are outlined below:

Interbank Lending Rate:
Overnight Rate: 0.5% pa
1-month Lending Rate: 1.0%-2.5%

Customer Rates:
Short-term (1-3 months): 6%-12% pa
Medium-term (6-12 months): 8%-15% pa
Long-term (1-3 years): 10%-18% pa

While customers will receive rates below this range to secure a profit margin for the banks, compensation is still provided. The following categories guide expectations on interest offerings based on current levels:

Savings: 0.5%-2.0% pa
1-month Fixed Deposits: 1%-3% pa
3-month Fixed Deposits: 1.5%-4% pa

(NOTE: These are broad industry ranges and not specific to any particular institutions. Bank and other FI rates may differ).


Policy Remarks:

The significant spread between loan rates and deposit rates in foreign currency (USD) suggests that banks could realize healthy gains from trading idle FX deposits. This would make them capable, in principle, of providing customers’ funds on demand, as there would be profits or Interbank lending facilities to draw from at around the above rates. 

Following these guidelines and the implications of rate offerings on FX loans and deposits, which CNIMBs are governed by, this appears a carefully considered by the Apex Bank, as it builds on prior moves that improved FX supply and enhanced transparency.

Having improved FX inflows through formal channels, the Bank now aims to further boost liquidity by encouraging the mobilization of idle balances and allowing banks to trade with domiciliary accounts.


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