Liquidity Tightens As CBN Withdraws N3.83trn From Financial System

Nigeria’s financial system experienced a tightening in liquidity last week as the Central Bank of Nigeria (CBN) intensified its liquidity sterilisation operations, withdrawing an estimated N3.83 trillion from the banking system despite significant inflows from maturing securities.

Data from the Financial Markets Dealers Association (FMDA) Weekly Market Snapshot showed that average system liquidity declined by 1.10 per cent week-on-week to N4.61 trillion, reflecting the impact of the apex bank’s sustained mop-up activities aimed at reducing excess liquidity in the economy.

The report noted that the liquidity squeeze came amid continued inflows from maturing instruments, but these were not enough to offset the volume of funds sterilised by the CBN during the review period.

Tighter liquidity conditions were reflected in the fixed income market, where yields on government securities rose across most maturities amid cautious and bearish investor sentiment.

According to FMDA, Federal Government of Nigeria (FGN) bond yields trended upward during the week, with the average yield rising by 31 basis points to 16.71 per cent.

The report attributed this movement to weaker demand across most maturities as investors adjusted to the tightening liquidity environment.

Similarly, Treasury bill yields also climbed, particularly at the longer end of the curve, pushing the average yield higher by 45 basis points to 17.77 per cent as market participants demanded higher returns.

Market activity also slowed significantly during the week. Secondary market trading in FGN bonds declined by 25 per cent week-on-week, while Treasury bill turnover fell by 55 per cent, reflecting reduced investor participation amid tighter cash conditions.

Despite the liquidity squeeze, inflows into the financial system remained strong. FMDA projected that about N1.53 trillion would enter the system this week from maturing securities, slightly higher than the N1.48 trillion recorded in the previous week. Open Market Operation (OMO) maturities are expected to account for about 81 per cent of the total inflows.

In the foreign exchange market, the naira recorded mild losses, depreciating by 0.08 per cent at the Nigerian Foreign Exchange Market (NFEM) to N1,362.32 per dollar amid lower trading volumes. The parallel market also weakened by 0.36 per cent to N1,401.25 per dollar.

Meanwhile, Nigeria’s external reserves maintained an upward trajectory, rising by 0.78 per cent week-on-week to an average of $50.35 billion. The FMDA attributed the increase to sustained investor confidence and steady inflows from earlier crude oil export earnings.