FAAC’s N1.9trn injection stunts interest rates in Q2




The second quarter of this year was one that was fluid in both local currency and foreign exchange supply. The Federation Account Allocation Committee (FAAC) released N1.9 trillion or $12.5 billion that was shared among the three tiers of government. On the other hand, energy firms sold foreign exchange worth $602 million to some selected banks.



The combination of these actions brought down interest rates and strengthened the naira. The FAAC, only a fortnight ago, distributed N403.0 billion ($2.6 billion) to the three tiers of government, as allocations for the month of May. The previous month’s allocation stood at N750.0 billion ($5.0 billion), including the N410.0 billion ($2.7 billion) allocation for April and an arrears of N340.0 billion ($2.2 billion). The total of forex sold to banks by the energy firms to $602 million, outside what the Central Bank of Nigeria (CBN) supplied.



Afrinvest fortnightly observed that the increased liquidity inflow triggered a retreat in bond yields and inter-bank rates in June. It is reported that the May disbursals included N22.7 billion ($150.1 million) taken from the excess crude account, which is currently in credit of $3.2 billion (N484.3 billion) and N29.0 billion ($190.0 million) after the latest disbursals.



Afrinvest stated further that with the level of liquidity, the inter-bank market opened with a net credit balance of N189.3 billion ($1.3 billion) and closed with N451.8 billion ($3.0 billion) in the first week. FAAC allocations, worth N403.0 billion ($2.7 billion), were approved while N207.0 billion ($1.4 billion) was credited to the system. In the second week, the market opened with a net credit balance of N513.2 billion ($3.4 billion) and closed with N450.8 billion ($2.98 billion).



OBB and overnight rates remained constant towards the end of the fortnight and subsequently closed at 1.1 percent and 1.2 percent respectively. The system is expected to remain liquid. The supply of forex by the energy companies like the Nigerian National Petroleum Corporation (NNPC), Chevron, Total, Mobil and Addax Petroleum ensured the naira strengthened at the Wholesale Dutch Auction System (WDAS), inter-bank and parallel market in the last two weeks.



It appreciated at the WDAS auctions from N148.89/$ at the end of the previous fortnight to N148.60/$. This appreciation stems from a fall in the demand for dollar, relative to its total supply by the CBN and other energy forms. The naira gained marginally at the inter-bank market, despite volatility over the fortnight. It subsequently closed at N151.20/$ from N151.33/$ in the previous fortnight. Parallel rates stayed at N153.00/$ for most of the period under review. The markets are expected to remain stable over the next fortnight.



The increased liquidity in the system had its spiral effect on the bond market also. A turnover of 604.1 million units worth N662.4 billion ($4.4 billion) in 6,081 deals was recorded over the fortnight. The most active bond (measured by turnover volume) was yet again the 7th FGN Bond 2013 Series 1. The OTC bond market experienced price volatility on all maturities over the fortnight.



Yields, particularly on medium-term securities, moderated downwards at the beginning of the fortnight. However, the fiscal injection in the middle of the first week led to a spike in prices by the end of that week. Market operators were passive at the beginning of the second week, as they positioned themselves for the auction on June 23. This however reversed after the auction with prices of short-tenured bonds rising and medium-long tenured bonds moderating downwards.





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