Nigeria’s overnight lending rate rose by 2.5 percentage points this week after the central bank debited bank accounts for debt purchases, draining liquidity in the money market.
The overnight lending rate increased to 14.5 percent on Friday, up from 12 percent at the start of the week, after central bank debits of bank accounts for cash payments related to dollar and treasury bill purchases.
The central bank sold around $250 million forwards at a special auction and an undisclosed amount at the spot market in its bid to improve dollar liquidity and support the country’s ailing naira currency. The sales drew liquidity out in the money market and pushed up the interest rate.
Although the central bank repaid around 234 billion naira in matured treasury bill on Thursday, the same amount was rolled over into another set of treasury bills sold at an auction on the same day. Market liquidity stood at around 35.06 billion naira surplus on Thursday, compared with 40 billion naira in surplus last week.
Traders said the cost of borrowing among commercial lenders may further increase next week as the central bank continues to inject more dollars into the foreign exchange market to defend the local currency. The value of the naira has plummeted in the last few weeks due to a scarcity of dollars, although its value has fluctuated in the last few weeks due to the central bank’s interventions.
The naira closed at 306.15 to the dollar on the official interbank market on Friday, slightly firmer than 306.20 per dollar the previous day. But the local currency weakened on the black market to 405 to the dollar compared with 395 per dollar the previous day.
The International Monetary Fund (IMF) said on Wednesday the naira was overvalued by around 10 to 20 percent and called for changes to Nigeria’s exchange rate policy, increasing pressure on the local currency despite the improved supply of dollars. ($1 = 305.20 naira)