Nigeria's overnight interbank rate eased to an average of 3 percent on Friday from 5 percent last week after banking system liquidity rose thanks to the March distribution of oil revenues to government agencies and the maturation of treasury bills.
Africa's biggest economy, Nigeria distributes revenue from its crude exports among its three tiers of government - federal, states and local. A portion of state and local government revenues pass through the banking system.
Traders said that about 200 billion naira ($1.01 billion) in budget allocations were injected into the banking system on Monday, while 96.36 billion naira in matured treasury bills reached the system on Thursday, increasing liquidity and forcing down the cost of borrowing among commercial lenders.
The level of liquidity in the banking system was raised as well by additional cash inflow from a cash call payment to joint crude oil production partners by the government during the week.
Traders, however, said the central bank issued a series of treasury bills to mop up excess liquidity in the system, curbing inflation and reducing the negative impact on forex demand.
The central bank floated open market operations treasury bills worth 105.27 billion naira from the banking system twice in the week to get rid of excess liquidity. It also debited banks for cash reserves ratio of about 16.2 billion naira.
"Even with the cash withdrawals by the central bank through OMO auction and CRR debit, the market remains liquid and able to support lending activities at the 3 percent level next week," one dealer said.
Traders said the liquidity level stood at around 454 billion naira on Friday, compared with 232.85 billion naira last week.
The interbank rate, which reflects the level of naira cash liquidity in the banking system, is expected to remain broadly stable next week because of expected lower cash outflow from the system, traders said.