Since the Central Bank of Nigeria (CBN) announced the restriction of individuals and Nigeria’s corporates from participating in both primary and secondary markets of its Open Market Operation (OMO) window, some people have been mistaking OMO Bills with Nigerian Treasury Bills (T-Bills). This has resulted in the wrong interpretation of the CBN’s OMO policy.
OMO is a liquidity management tool issued by the CBN to control the volume of money in circulation. When the central bank observes there is excess money in supply, it sells OMO Bills – also called CBN Bills – to investors through the banks to mop up the surplus funds and vice versa.
Excess money in circulation could cause aggregate the demand of goods and services to rise above supply in the economy thereby worsening Nigeria’s already high inflation rate, a situation contrary to CBN’s core mandate of ensuring price stability.
Traditionally, OMO Bills are designed to mature within 14 to 66 days, but due to the peculiar nature of the Nigerian economy where its financial system often experiences excess supply of naira, the apex bank has not only extended the tenors of the OMO Bills in recent years up to a year maturity period, it has issued more OMO Bills since 2017 more than it did in the preceding decade.
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Also, the interests on these Bills come at extra costs to the CBN and not the federal government. This implies the apex bank bears the costs of repaying the Bills to investors including accruing interests, thereby hurting the financial regulator’s balance sheet. This is why a breakdown of the federal government’s domestic debt only includes T-Bills, Bonds and Promissory Notes, but excludes OMO Bills.
On the other hand, Nigerian T-Bills are short-term debt instruments issued by the CBN on behalf of the federal government with less than one-year maturity period. The federal government uses different debt instruments in the country’s financial system such as T-Bills, FGN Bonds, Eurobonds, FGN Sukuk Bonds, FGN Savings Bonds, Green Bond, among others to borrow money to finance its budget deficit.
T-Bills in Nigeria are guaranteed and backed with the full faith of the Federal Government. As a result of this, the government cannot default, and in the event that the government cannot pay, the CBN can print money to settle all investors. Also, the instruments are issued at an interest rate often referred to as a discount rate.
Besides all these, T-Bills and OMO Bills share some similarities such as they are both issued in maturities of 91-days, 182-days, and 364-days. Both T-Bills and OMO Bills can be bought in the primary and secondary market, and are discount instruments because the investor gets its interest upfront. It is also noteworthy that income from OMO Bills and T-Bills are exempted from taxes.
However, rates on the instruments depend on the objective and aggressiveness of the apex bank. The CBN could lower OMO rates to cut the cost of borrowing or keep rates attractive just as we currently have in Nigeria. This is to attract foreign portfolio investment and sustain inflows of dollars when the external reserves are pressured.
In simple terms, OMO Bills are issued and owed by the CBN. However, even though Nigeria T-Bills are issued by the CBN on behalf of the federal government, they are owed by the federal government and captured as part of its domestic debt burden.
