Inter-bank lending rates fell sharply on Friday to an average of 14 per cent, from around 19.33 per cent the previous day after about N283bn ($1.80bn) in budget allocations to government agencies hit the market.

The Federal Government distributes money from oil revenue to its three tiers of government from a centrally held account, which provides liquidity for the banking sector and eases the cost of borrowing among banks.

Dealers said the market was short prior to the disbursal of the budget funds due to stricter Central Bank of Nigeria’s measures to tighten liquidity in the system and support the local currency.

Reuters quoted a dealer as saying,  “The market opened with a deficit of about N197bn on Friday, but by the time the budget allocations hit the system today, the cost of borrowing fell sharply.”

The CBN in July raised the cash reserve requirement for banks to 12 per cent from eight per cent, and reduced net open foreign exchange positions to one per cent from three per cent, to restrict the money supply and support the currency.

The bank also barred banks that borrow naira funds from its official window from using those funds to buy dollars at its by-weekly auction, a bid to crack down on currency speculation.

Dealers said the release of the budget funds on Friday was a relief to the market which had been hit by cash shortages.

The secured Open Buy Back dropped to 14 per cent, from 18 per cent the previous day and lower than the 15 per cent it closed last Friday.

Overnight and call rates closed at 14 per cent each, compared with 20 per cent respectively on Thursday.

Reuters quoted a dealer as saying, “We see rates stable at this level for the better part of next week because of the fewer trading days and the improved liquidity level in the system.”

The naira firmed to a more than three and half month high against the United States dollar on the inter-bank market and official window last Wednesday, supported by dollar flows from offshore investors into Nigerian debt.

The naira closed at N157.25 to the dollar, a level last seen on April 25 and higher than the N158.75 it closed at the previous day.

The local currency has gained 1.84 per cent this year, from N160.20 to the dollar on January 3.

The CBN sold $200m at N155.80 to the dollar, compared with $147m sold at N155.83 to the dollar at its previous auction on Monday.

Source: Punch