Economic expert and analyst with Standard Chartered Bank, London, Razia Khan, has described the removal of N1 trillion by the nation’s apex regulatory body, the Central Bank of Nigeria (CBN) as a welcome development, saying that the process would lead to delivery of higher deposit rates and naira stability.

CBN had on Wednesday removed an estimated N1 trillion, about $6.27 billion from the banking system, causing interbank lending rates to spike by 7 percentage points from Tuesday’s close, but failing to lift the naira.

“A shock of this nature was what was required in order to start the process that will deliver higher deposit rates and naira stability. It’s only the first day of implementation, so in time things should settle,” Khan said.

“We expect the naira to trade more strongly after the holidays, falling back within the band. The market will grapple with how to cope with the additional tightness in liquidity. However, given that the level of dependence on public sector deposits varies widely, we do not expect sustained pressure on loan rates,” she added.

The internationally reputed analyst said she expects interbank rates to settle, but perhaps closer to the top end of the band around the MPR, rather than the lower band. Interbank lending rates rose to around 19 percent on Wednesday, up from around 12 per cent at Tuesday’s close, after the central bank debited lenders accounts to meet a hike in the cash reserve ratio (CRR) on public sector deposits to 50 per cent, from 12 per cent previously.

CBN said it would impose the requirement two weeks ago to tighten liquidity and support the naira.

But the naira fell slightly against the dollar, closing at 160.10 to the dollar on the interbank market, weaker than the 159.65 to the dollar it closed at on the previous day.

Reuters had quoted dealers saying this was because banks had already sold their dollar positions to meet the new requirement ahead of Wednesday, so the impact had already been priced in.

“The central bank finally debited our accounts today, draining the market liquidity and the overnight rate went up to 19 percent,” one dealer said.

Traders said many lenders had already sold down liquid assets and dollars to replenish their cash balances in preparation for the withdrawal.

“The market had priced the effect of the huge cash withdrawal since the announcement two weeks ago, while fresh dollar demand and lack of dollar flows are expected to push down the value of the naira next week,” another dealer said.

Analysts say Nigeria will need to attract back foreign inflows for the central bank’s move to have a sustained positive effect on the naira.

•Credits: Daily Trust (text), Razia Khan (photo, from her Twitter handle).