Forex Demand Drops as Liquidity Squeeze Persists
The liquidity squeeze that hit the money market about two weeks ago has taken its toll on the foreign exchange market as demand nose-dived by some 51.4 per cent or $43.7 million yesterday at the Dutch Action System (DAS).
At the close of business, the naira exchange rate against the United States' dollar however remained unchanged at N132.84 per dollar.
The persistent increase in demand for foreign exchange within the last two months has been a source of concern to the Central Bank of Nigeria (CBN). To stem this development, the Monetary Policy Committee (MPC) of the apex bank had last week , advised the sustaining of recall of public sector deposits from banks.
"The Monetary Policy Committee (MPC) at the end of its 18th meeting in July 2004, decided to keep unchanged the recall of public sector funds lodged with deposit money banks," the apex bank said.
It would be recalled that at the end of its previous meeting (June, 2004), the MPC approved the withdrawal of public sector deposits amounting to N74.5 billion, representing 75.6 per cent of the total public sector deposits from only four parastatals from the banks to the CBN.
The MPC's communiqu_ had maintained that the recall of these funds would help to sustain the tightening of monetary policy stance agreed to the previous meeting, in order to stem the rising inflationary pressure and the high demand for foreign exchange.
"Available information since the last meeting indicates that the pressure on prices has continued. The daily average demand for foreign exchange dropped, but remained unsustainably high.
"The gross official external reserves increased and the naira exchange rate in the Dutch Auction System (DAS) segment of the market owing to the increased supply of foreign exchange by the CBN. The exchange rate depreciated in the Bureaux de Change (BDC) market, thereby widening the spread between the DAS and the BDC exchange rates," the MPC had observed.
The decision of the big banks which accounts for over 70 per cent of funds in the inter-bank market to recall their matured placements and refuse to rollover or grant credits to the small and medium-sized banks had created a lot of uncertainty in the money market.
In addition to this was the flight to safety by customers through panic withdrawal of their funds from banks perceived as not having the financial muscle to meet the N25 billion new capital.
Meanwhile, the summary of yesterday's transactions, shows that out of the $85 million offered by the apex bank Wednesday, total amount demanded by 40 banks on behalf of their customers stood at $41,282,033.90 out of which bids amounting to $40,938,885.95 were successful, disqualified bids stood at $90,926.95, while bids emanating from unfunded accounts stood at $252,221.00.
The $40,938,885.95 sold to banks yesterday by the apex bank is 56.2 per cent or $53 million less than the $93,603,336.93 sold in the last trading session, while the $41,282,033.90 demanded 58.2 per cent or $57.5 million less than the $98,778,489.82 demanded in the previous day's transaction.
Further analysis indicates that the highest bid rate fell from N133.50 per dollar to N133.20, while the lowest bid rate moved up from N130.50 to N132.84 per dollar.
Cumulatively, the $40,938,885.95 sold to banks by the banking watchdog yesterday, brings to $25.11 billion the total amount of foreign exchange that has been sold to banks by the CBN since the debut of the DAS July 22, 2002.
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