The Central Bank of Nigeria has issued a total of N1.5 trillion in Open Market Operation (OMO) bills since Olayemi Cardoso took the helm as governor in a bid to stem inflation and prop up the naira, whose steep decline has unsettled the economy, a BusinessDay analysis shows.
The bids were mostly in long-tenured bills of 180 to 365 days maturity.
Although there have been six auctions since Cardoso’s tenure, only five summed up to the N1.5 trillion raised so far, as the Dec 22, 2023 auction recorded no sale due to investors bidding too high, sources familiar with subject matter said.
Sources also said there were discretionary bids in November.
The International Monetary Fund (IMF) recently recommended that the CBN raise OMO bills of up to N2 trillion in 12 months to reduce excess liquidity in the economy.
“Continue withdrawing excess liquidity using short-term instruments (OMOs or repos). The initial aim should be to extract the remaining N800 billion in excess reserves, and up to N2 trillion over the next 12 months,” the IMF said.
This year, the CBN has had three OMO bill auctions and has mopped up N1 trillion in liquidity.
In an interview last week, Cardoso said the CBN’s inflation-targeting policy aims to rein in inflation to 21.4 percent.
The country’s headline inflation rate quickened to 29.90 percent last month, up from 28.92 percent in December, according to the National Bureau of Statistics.
Money supply in the country increased by 44.32 percent in six months to N92.87 trillion as of January 2024 from N64.35 trillion in June 2023, according to the CBN.
Money supply refers to the total amount of money circulating in an economy. It includes physical currency (like coins and banknotes) and various types of deposits in banks that can be quickly converted to cash.
“The adoption of the inflation-targeting framework involves clear communication, use of monetary policy instruments, and collaboration with fiscal authorities to achieve price stability, fostering market confidence and positively influencing consumer behaviour,” he said.
According to the recent CBN data, total money supply increased to N78.7 trillion in December from N72 trillion in November.
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 the aggregate demand for 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.
Ayooluwade Ogunwale, a fixed-income analyst at Cordros, said the primary tool for the CBN to fight inflation is interest rate management.
“Some unconventional means are providing financial aid to specific sectors, like we have some targeted agricultural finance incentives that should help prop up local production and put downward pressure on prices,” he said.
He said the CBN mopping N2 trillion using OMO bills might not rein in inflation because Nigeria’s inflation is cost-driven.
“I belong to the school of thought that our inflation is more cost-driven and not demand-push. But we can’t discount the impact of the current devaluation in imported products, considering how import-dependent we are,” he said.
Ogunwale said that a way to manage the speculative actions by some foreign exchange traders is to reduce liquidity available to banks. “That is why I align with that policy of reducing banks liquidity and making naira assets more attractive.”
Umarhu Mustapha, a Lagos-based portfolio manager, said there is a need to raise interest rates in a bid to reduce inflation.
“Once there is an increase in interest rates, it provides incentive for investors to invest their money while reducing money supply. Once money supply is reduced, inflation comes down,” he said.
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