Implications of CBN's New Instruction on Open-Market Operations

Friday, October 25, 2019 / 1:35 PM /by FDC Ltd / Header Image Credit: Economic confidential

A rash of new directives about barriers to participating in the OMO bills issues by the CBN. First it was banks who were not allowed to buy T/bills on behalf of borrowing customers and subsequently all Nigerian corporates and individuals have now been denied access to the market.

This was a form of moral coercion on the banks to increase their loans to the private sector. It is believed that an increase in bank credit to the private sector will lead to increased growth and employment. Total credit exposure to the private sector is now N25.47trn. The banks are wary to rapidly grow risk assets at a time of high default risk.

The implications of these guidelines is that the funding of CBN secondary market bills will be the sole prerogative of the foreign investors (hedge funds) i.e. 'hot money'. If the international investors who are volatile and jittery flee the market, the FGN debt will be funded mainly by the CBN (ways and means advances).

This appears like a risky bet in terms of inflation which is already ticking upwards. Secondly, there are minimum requirements of T/Bill holdings by the pension fund portfolios as prescribed by PenCom.

Therefore, it is likely that a solution to the LDR problem could lead to a much wider systemic challenge with serious unintended consequences. There is the fear that increased naira liquidity could put pressure on the currency in the forex markets.

Implications

• Would give room for foreign portfolio investors, as OMO auctions are mostly oversubscribed. However, FPI is hot money and is not sustainable for the economy. It could fizzle out at the slightest sniff of crisis.
• Could trigger currency weakness as investors shift to the foreign exchange market
• To increase activities in the stock market. Investors are attracted to high returns and the performance of companies listed on the NSE is a function of macroeconomic variables. Currently, the YTD return is -16.14%.

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