Nigeria’s Central Bank (CBN) has been forthcoming with its intention to boost the economy by encouraging credit creation and manufacturers to source raw materials locally, but the apex bank’s resolve will face its most stringent test over the next few months.
Large maturing open market operation (OMO) bills up until February next year present the central bank with two options: settle maturing bills or roll them over.
Godwin Emefiele, CBN governor, said in London last week that the bank would offer more OMO auctions to counter upcoming maturities by September/October, but it remains to be seen how the pro-growth agenda would fit in the scheme of things.
The choice the bank makes has far-reaching implications as a significant chunk of maturing debts is held by foreign investors. A run-off of maturing bills would impact external reserves and exchange rate stability.
On the other hand, the bank could risk jeopardizing its efforts so far at stimulating economic growth if it raises rate higher to keep scarce dollars within the country.
“We think we (Nigeria) are already at an inflection point in terms of the direction of interest rates,” analysts at Lagos-based investment house Chapel Hill Denham said in a note to clients. “CBN’s balance sheet policy will likely tighten to compensate for higher risk premium and encourage foreign portfolio investors (FPIs) to roll over maturing bills.”
An estimated $16.4 billion worth of OMO bills would mature between August and November. The four months would see the maturity of debts above the annual average of $3.1bn from July 2019 to mid-year 2020, according to Chapel Hill Denham analysts. First Securities Discount House (FSDH) places maturing bills at over N9.6 trillion.
As of May, 37 percent of the bills are held by foreign investors.
The challenge for Africa’s biggest economy, according to analysts at Chapel Hill Denham, lies in the large OMO maturities and anticipated capital outflows, a build-up in crude oil inventory pressuring price, and rising imports of goods and services which would affect current account balance.
Current account balance as at Q1 2019, adjusted for one-offs, was the lowest since 2016 despite improvements in oil price and Nigeria’s production levels.
“The CBN has less room to rebalance current account without aggressively tightening liquidity, introducing FX restrictions and allowing the I&E window rate to weaken,” Chapel Hill Denham analysts noted.
Even at $44.45 billion as at August 14, the country’s external reserves – roughly about seven months import cover and slightly above the IMF’s six months benchmark – are still susceptible to shocks, having high foreign holdings of OMO bills and estimated swap position of $7.5bn.
To support the economy, the CBN has maintained an accommodative balance sheet since the second quarter of the year.
Wale Okunrinboye, head of research at Sigma Pensions, said over the last three years, the choice between “growth and exchange stability” for the apex bank has always been in the favour of the latter.
Nigeria’s currency has relatively stabilized against the dollar, and inflation in July printed 11.08 percent, the lowest in 42 months.
Analysts at FSDH and FDC, however, say a single-digit band for inflation would remain elusive with the expected increase in systems liquidity from credit creation and the new minimum wage.
SEGUN ADAMS & ISRAEL ODUBOLA
