Central Bank of Nigeria and OMO Bills: Tough Love?


Wednesday, March 03, 2021 / 2:03 PM / By CSL Research / Header Image Credit: Ecographics

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According to a Bloomberg report, in a statement credited to the Central Bank of Nigeria's (CBN) Director of Monetary Policy, Hassan Mahmud, the Bank would phase out after the settlement of current obligations, the offering to non-residents of the "Open Market Operations bills." He however did not give a time frame. This decision, in effect, is ending an era headlined by a desperate chase of the greenback. The question on the minds of many analysts is how this will affect the foreign exchange management system in Nigeria given that FPIs investment in OMO bills are a significant source of foreign exchange for the country.


The CBN's Open Market Operations is an avenue through which the Bank manages system liquidity and interest rates as part of its core monetary mandates. However, OMO bills' offering to non-residents had commenced as a backdrop of the 2015 oil-price collapse, which led the Nigerian economy into a recession. At the time, the CBN, in a bid to source more dollars to improve the foreign exchange reserve and stabilize the foreign exchange market offered attractive rates which peaked at 18.6% on the 358days instrument in 2018. Thus, foreign portfolios (FPI) sighted opportunities for carry trade, leading to the influx of 'Hot Money'.


Asides from the pressure the transactions have placed on the cost of liquidity management for the CBN, last year, the Nigerian economy witnessed firsthand how a switch in sentiment could shake the essence of issuing the bills ab initio. As a backdrop of the pandemic's outbreak, the global demand for crude-oil had plunged, leading to a drastic drop in crude-oil price ( a significant source of the Nigerian government's foreign exchange receipt) in 2020. In hindsight, the Naira's weakness might have evaded headlines save for the activities of FPI, who sought to repatriate their funds to 'Safety'.


Recall, the CBN had limited participation in the OMO bills space to just Banks and Offshore Investors in Q3 2019, a move that ushered in the depressed yield environment in 2020. 2021 has seen a significant dip in the value of OMO issuances, seen in the 86.81% y/y drop recorded on 11 February, 2021. The recent plunge in value of allocations points to a deliberate decision by the Bank to reduce the sale of OMO bills. The bid-to-cover ratio of 3.75x further explains things in 2021, given it was 0.75x in the corresponding period in 2019.


If implemented, we believe this bodes well for the CBN, given the impact on the cost of liquidity management for the Bank. Also, our analysis showed that FPI holding in the OMO market has averaged 53% in the last two years. Meaning, at the current outstanding OMO obligation of N1.66tn, the CBN would require a little over 6.24% of its external reserves (US$34.99bn) as of March 1 2021, to offset FPIs portion of due maturities.

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