Nigeria’s banking system liquidity shortfall which hit 59 billion naira on Wednesday was expected to widen to more than 100 billion as country’s central bank sold 207 billion naira in treasuries on Thursday to mop up liquidity, a day after it raised more money than planned via a debt auction as it moved to keep borrowing costs high to support the currency, traders said.
The bank is aggressively mopping up funds from the banking system to help curb inflation and battle weakness in the local currency. This is pushing up costs, especially for the government, which is battling to contain a widening deficit.
It sold six-bill open market bills (OMO) at 17.95 percent, higher than the 16.8 percent it paid to place the same maturity at the auction on Wednesday.
“They are mopping up liquidity at all cost, whereas the government is trying to reduce borrowing costs,” one trader said.
“It seems like the central bank and the debt office have conflicting interests,” another trader said.
Central Bank Governor Godwin Emefiele has said he expects rates to remain tight to support the portfolio inflows and the currency. The bank is due to decide on interest rates on Tuesday and most analysts expect it to leave the benchmark on hold at 14 percent.
Overnight rates had started to inch up, traders said. Money market rates opened at 11 percent on Thursday after they hovered between nine and 10 percent the previous day.
The naira traded at around 360 to the dollar on Thursday for investors, who have been offering to sell the U.S. currency at 365, close to the black market rate of 367.
A banking system liquidity shortfall which hit 59 billion naira on Wednesday was expected to widen to more than 100 billion, traders said.
Nigeria emerged from recession in the second quarter as oil revenues rose, but the pace of the recovery has been slow. The government has struggled to boost income, suggesting its deficit and short-term borrowing could rise further.
Africa’s biggest economy has a series of debt issues lined up this year, but it has struggled to tap concessionary funds especially from the World Bank. It was planning for a shortfall of $7.5 billion for its 2017 budget, which could widen.
Rate-setter Doyin Salami said central bank investments in government treasury bills had risen 30 percent to 454 billion naira since December, leaving the bank providing “piggy bank” services to the state. (editing by John Stonestreet)