Nigeria sold the lowest amount of OMO in 2020 than it did in the last four years after a ban on domestic investors by the Central Bank of Nigeria (CBN) crashed the sales of the short-term instrument.
The Central Bank sold OMO worth N6.5 trillion in the year 2020, which was a decline by 57.5 percent and 62.25 percent from the N15.3 trillion and N17.1 trillion worth of the securities sold in 2019 and 2018 respectively, according to data obtained from the CBN and analysed by BusinessDay, showing the impact of the ban on the OMO issuance.
In what was aimed at boosting real sector growth in an economy growing below its population, the CBN had in an October 2019 memo restricted non-bank local investors from participating in OMO bills, meaning only banks and foreign investors are allowed to buy the short-term securities.
What are OMO bills and what are they used for
Known fully as Open Market Operation (OMO), the short-term instrument is one of the numerous tools used by monetary authorities to control the amount of money in circulation.
What this means is that it is only the central bank of a country that wields the power to issue OMO.
To increase the amount of money in circulation, the apex bank buys back OMO in the hands of banks whenever it wants to increase the amount of money in circulation, a move known to economists as expansionary monetary policy; while it sells OMO whenever it wants to reduce the amount of money in circulation, known as contractionary monetary policy.
But unlike what is obtained in other climes where sales and purchase of OMO bills are opened to banks, in Nigeria, the case seems different.
After the oil collapse that sent Nigeria into its first recession in 28 years in 2016, Nigeria resorted to using OMO sales to attract dollar inflows and boost falling reserves.
In which case, it opened OMO purchase to both foreign and local investors. Thanks to the high-interest rate environment at the time, the OMO sale got the attention of both local and foreign investors.
OMO sales rose from as low as N4.4 trillion in 2016 to N17.1 trillion in 2018, after rates on the short-term instrument rallied to 17.6 percent.
To manage the situation effectively, the apex bank on the one hand was able to bolster reserves by using the OMO sales to attract dollar inflow. On the other hand, it was propping the excess naira liquidity in the system by tightening the amount of cash that commercial banks have to pack with the monetary regulator at zero interest rate.
While that paid-off, a major downside comes at a time when risk perception worsens with foreign investors repatriating their profits and failing to roll-over maturing OMO bills.
That was the scenario witnessed last year in the heat of the pandemic that dried up dollar inflows, thus prompting the CBN to ration the sales of the greenback.
The move sent the wrong signal to the market, stopping fresh capital from coming in while old investors were trapped.
Data from the National Bureau of Statistics (NBS) showed that foreign investment into money market instruments which OMO falls in, declined by 69.1 percent to $4.1 billion last year from $13.4 billion in 2019.
As a result of the ban, funds from local investors that could have found a way into OMO was channelled more into other instruments like bonds, stocks, treasury bills amongst others.
The inability to attract enough dollars due to the fall in OMO sales alongside the fall in oil revenue, explains why the naira suffered a huge blow against the dollar last year.
Outlook for OMO sales?
In Nigeria, beyond controlling the amount of money in circulation, OMO issuance will continue to be a major source of dollar inflow.
While there were talks that the CBN plans to restrict foreigners from participating in the OMO market, a rumour which the apex bank itself debunked, it would be a bitter pill to swallow especially at this time when Nigeria’s external reserves have fallen to 34.6 billion as at March 23, 2021.
The fall in the reserve is due to increased intervention by the CBN and is occurring at a time prices of oil, which is Nigeria’s biggest source of dollar inflows, are rallying
As of March 18, 2021, the CBN has sold OMO bills worth 652.4 billion at an average yield of 6.2 percent.
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