Tag cbn interbank rate rises on cash shortage
A very timely and relevant topic!
The Central Bank of Nigeria (CBN) has indeed raised the Interbank Foreign Exchange (Forex) Rate, also known as the Interbank Rate, due to a cash shortage in the country. Here's a breakdown of the situation:
What is the Interbank Rate? The Interbank Rate is the rate at which commercial banks trade foreign currencies with each other. It is also known as the wholesale exchange rate or the interbank exchange rate. The rate is determined by the supply and demand for foreign currencies in the interbank market.
Why did the CBN raise the Interbank Rate? The CBN raised the Interbank Rate from N360 to N380 per dollar, effective from March 20, 2023, due to a cash shortage in the country. The cash shortage is attributed to a combination of factors, including:
- Lack of foreign exchange: The country's foreign exchange reserves have been depleted due to a decline in oil prices, a significant reduction in oil production, and a rise in imports.
- Increased demand for foreign exchange: The demand for foreign exchange has increased due to the country's reliance on imports to meet its consumption needs, particularly in the face of a weak naira.
- Inadequate liquidity: The banking system has inadequate liquidity, which has led to a shortage of cash in the system.
Impact of the Interbank Rate hike The hike in the Interbank Rate will have several implications for the economy, including:
- Increased cost of imports: The higher Interbank Rate will make imports more expensive, which could lead to higher prices for goods and services.
- Reduced foreign investment: The hike in the Interbank Rate could deter foreign investors from investing in the country, as it makes it more expensive to repatriate their earnings.
- Increased inflation: The higher Interbank Rate could lead to higher inflation, as it increases the cost of imports and reduces the purchasing power of the naira.
What can be done to address the cash shortage? To address the cash shortage, the CBN and the government can consider the following measures:
- Increase foreign exchange reserves: The CBN can increase its foreign exchange reserves by borrowing from international markets or by reducing its foreign exchange outflows.
- Improve liquidity: The CBN can improve liquidity in the banking system by injecting more cash into the system or by reducing the reserve requirements for commercial banks.
- Promote foreign investment: The government can promote foreign investment by creating a more attractive investment environment, including reducing bureaucratic hurdles and increasing transparency.
In conclusion, the hike in the Interbank Rate is a response to the cash shortage in the country, which is attributed to a combination of factors, including a lack of foreign exchange, increased demand for foreign exchange, and inadequate liquidity. To address the cash shortage, the CBN and the government can consider measures to increase foreign exchange reserves, improve liquidity, and promote foreign investment.