In a bid to ensure that there is not too much naira flowing around the economy, to curb inflation and demand for dollars, the Central Bank of Nigeria (CBN) is forcing banks to buy stabilisation securities and other short term instruments. This has seen a spike in yields on these short term financial assets, higher than what is obtainable in key markets in Africa.
As at the end of November, average yields on 3-month Nigeria treasury bills were as high as 13.5 percent, which was higher than 8.83 percent on similar tenure bills in Kenya and 8.1 percent in South Africa. This means that it is more expensive for the Nigerian government to borrow than the Kenyan or South African government. This higher cost is usually a reflection of the perceived risk level of lending money to the Nigerian government compared to the other governments.
The risk is seen in the spread between the yields on Nigeria’s 3-month treasury bills and that of the US which was also at a high of 11 percent, with US 3-month Treasury bill yields standing at 2.36 percent.
Uncertainty over the outcome of the 2019 national elections has also raised the risk perception of the Nigerian government. This has led to a significant outflow of foreign portfolio investors, who are now selling down their holdings of both government debts and equities, increasing demand for dollars, and leading to a sharp fall in the stock market, which is down 19.27 percent since the beginning of the year. CBN has resorted to increased open market operations (OMO) and pushed up yields in a bid to incentivise fleeing investors to stay back in the country.
The implication of the increase in OMO bills issuance and yields according to Johnson Chukwu, managing director/CEO, Cowry Asset Management limited, is that it reduces banks’ capacity to lend to the real economy because large level of liquidity is taken from the system.
Chukwu, who spoke with BusinessDay by phone, said it limits the levels of economic activities, adding that it results to banks borrowing money from the inter-bank market.
The Nigerian inter-bank rate, which is the rate at which banks borrow and lend to each other rose to 38.58 percent on Monday from 27.21 percent Friday last week.
Open-Buy-Back (OBB), a money market instrument used to raise short term capital, also rose to 36.67 percent on Monday from 24.57 percent on Friday.
This is as the Central Bank raised its Open Market Operations (OMO) mop ups, leaving liquidity levels negative in the first three trading sessions last week.
OMO is the buying and selling of government security, which enables a central bank to control the supply of money in the banking system.
A report by Afrinvest Securities shows that the CBN, last week, through OMO auctions, mopped a total of N989.5 billionn on all trading days. The short-term offerings received the least attention (0.0x undersubscribed) with N130.0 billion offered against N0.1 billion sold. In the same vein, the bid-to-cover ratio on medium- and long-term bills were also 0.3x and 0.8x respectively with N103.0 billion sold out of N310.0 billion offered on the medium-term instruments and N439.0 billion sold out of N549.1 billion offered (including special OMO sale of N39.5bn conducted on Friday).
However, a total of N497.8 billion was scheduled to hit the financial system on yesterday, consisting of (Maturing T-Bills and OMO bills worth N25.4bn and N472.4bn respectively).
On Monday, the CBN auctioned a total of N100 billion via OMO. The breakdown of the auction revealed that N20 billion was offered for 100 days at a stop rate of 11.75 percent. The offer which matures on March 28, 2019 was undersubscribed by N6.00 billion.
Also, the N30 billion which was offered for 205 days tenor at a stop rate of 13.5 percent, was undersubscribed by N1.06 billion. The CBN offered N50 billion for 310 days at a stop rate of 15 percent and it was undersubscribed by N17.54 billion.
Ibrahim Tajudeen, Head of Research, Chapel Hill Denham, stated three reasons why the OMO auction is done on a regular basis.
He said banks are not really bidding or complying enough with the auctions by the CBN. The banks are not bidding to buy much or they are buying in little amounts and they are also asking for higher interest rates but the CBN does not want to give higher interest rates.
Also, Tajudeen explained that the CBN is trying to reduce naira liquidity so that people will not speculate on the dollar with their naira.
“When you have too much naira, you will be tempted to buy dollars. They are trying to avert speculative demand for dollar through the OMO auctions. And they also believe that the election period which we are in will lead to increased spending. When there is increased spending it will lead to increased inflation,” Tajudeen said.
Godwin Emefiele, governor of the CBN, said early this month at the bankers’ dinner held in Lagos that monetary policy stance will remain judicious, research driven, adequate and supportive of the real economy subject to underlying fundamentals.
He said the current tight stance is expected to continue in the near-term, especially in view of rising inflation expectations and exchange rate market pressures.
“Though we will act to appropriately adjust the policy rate in line with unfolding conditions and outlooks, the CBN will continue to ensure that the policy interest rate is delicately set to balance the objectives of price stability with output stabilisation”.
HOPE MOSES-ASHIKE BUNMI BAILEY
