The nation’s interbank lending rate dropped by 6.5 per cent to five per cent on Friday, as the money market was awash with cash from budgetary disbursal and coupon payment on matured bonds.

The interbank lending rate, also called the cost of borrowing among banks, had closed at 11.5 per cent last Friday due to a drop in liquidity in the market necessitated by bond and treasury bills sales.

According to Reuters, traders said on Friday that around N400bn was injected into the banking system on Wednesday from the December budget allocations to states and local governments, while N49bn coupon on matured bonds was released by the Central Bank of Nigeria on Friday, boosting liquidity and forcing down the interbank rate.

On Thursday, the CBN withdrew around N217bn through the sale of short-dated Open Market Operations bills in a bid to reduce the level of excess liquidity in the banking system, but market liquidity remains high.

The balance in commercial banks’ accounts with the CBN stood at N254.46bn surplus on Friday, against N202.58bn the previous week.

“We strongly believe that the central bank will conduct more OMO next week to take out the excess cash from the system,” one trader said, adding that expected dollar sales at a special forex auction could also help reduce the liquidity level and seen rate rising again.

The naira was unchanged at 498 to the dollar on the parallel market and 305.25 a dollar on the official interbank window on Friday as the market awaited the result of a special forex auction targeted at selected sectors of the economy.

The central bank had on Wednesday asked commercial lenders to submit backlog dollar demand from fuel importers, airlines, raw materials producers, and makers of agricultural chemicals and machinery for manufacturers.

The stock market’s main index rose by 0.15 per cent to 26,328 points, the highest level since January 16, driven by gains in energy company, Oando, which was up by 4.05 per cent and local French Total tick up 4.9 per cent.

Meanwhile, the CBN has asked banks to bid in a special currency auction to clear a backlog of dollar obligations that businesses owe.

In a notice to commercial lenders, the CBN said it would hold a retail foreign exchange auction to sell two- to five-month dollar forwards. The amount of dollars to be sold was unspecified, according to traders.

Last December, the CBN sold around $1bn on the forward market to clear a similar backlog of dollar obligations, in an effort to support production in the economy.