CBN Strengthens Naira’s Value, Mops up N4.72 Trillion Excess Liquidity Via OMO Bills
- The Central Bank of Nigeria (CBN) has taken steps to boost the naira's value by auctioning off about N4.73 trillion through its Open Market Operations (OMO) bills
- The apex bank initially planned to sell half the amount, but investors' appetite led the CBN to more than double the instrument
- OMO bills are short-term instruments used to remove excess cash from the system, boost the naira's value, and control inflation
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Pascal Oparada is a journalist with Legit.ng, covering technology, energy, stocks, investment, and the economy for over a decade.
The Central Bank of Nigeria (CBN) has intensified its battle against excess liquidity, raising N4.72 trillion through Open Market Operations (OMO) auctions in two days as investors chased yields approaching 20 per cent.
The huge mop-up came after investors submitted N8.62 trillion worth of bids for the short-term securities offered by the apex bank on August 26 and 27, highlighting strong demand for high-yielding naira assets.
Source: Getty Images
The CBN had advertised only N2 trillion across four auctions but ultimately allotted N4.72 trillion, more than double the amount initially offered.
Investors chase nearly 20% returns
The 132-day OMO recorded the strongest demand, attracting N3.48 trillion in subscriptions against the N500 billion offered.
The CBN allotted N2.18 trillion at a stop rate of 19.65 per cent.
The 152-day instrument also generated substantial interest, receiving N3.29 trillion in bids for N500 billion on offer. The apex bank eventually allotted N1.77 trillion at 19.32 per cent.
Shorter-dated instruments also attracted significant demand.
The 96-day OMO received N1.07 trillion in subscriptions, with N160.46 billion allotted at 19.85 per cent.
Meanwhile, the 97-day instrument attracted N783.49 billion in bids, leading to an allotment of N613 billion at 19.90 per cent, the highest stop rate recorded during the auctions.
Interestingly, the longest-dated instrument cleared at a lower yield than the shorter bills, suggesting that some investors were willing to lock in returns for longer periods despite accepting slightly lower annualised yields, Punch reports.
CBN absorbs more cash than entered system
The latest OMO intervention came against a backdrop of substantial liquidity flowing into the financial system from maturing securities.
CBN data showed that N4.30 trillion in primary-market securities matured between August 26 and 27. At the same time, N762.89 billion was raised through primary-market sales on August 27.
That left an estimated N3.54 trillion net liquidity injection from primary-market activities over the period.
However, the CBN's N4.72 trillion OMO mop-up exceeded the amount injected, resulting in an estimated net liquidity withdrawal of about N1.19 trillion.
The move is significant because excessive naira liquidity can increase pressure on the foreign exchange market and potentially undermine efforts to stabilise the currency.
Banks still sitting on huge liquidity
Despite the aggressive mop-up, liquidity in the banking system remained substantial.
Opening balances held by banks and discount houses increased from N169.55 billion on August 26 to N223.89 billion on August 27 before easing to N194.76 billion on August 28.
The CBN's Standing Deposit Facility also held N3.42 trillion as of August 28, indicating that financial institutions continued to have sizable funds available for placement with the apex bank.
This suggests that the latest OMO operation, while significant, has not eliminated excess liquidity from the financial system.
Why OMO matters for the naira
OMO bills are short-term securities issued by the CBN primarily to manage money supply and liquidity.
When the apex bank sells the instruments, banks and investors exchange naira for the securities.
This temporarily removes cash from circulation and can reduce the amount of liquidity available to chase foreign exchange and other assets.
In theory, reduced liquidity can ease pressure on the naira while also helping the CBN manage inflationary pressures.
However, there is a trade-off. High OMO yields can make fixed-income securities considerably more attractive than equities and other investments, potentially diverting funds away from the Nigerian stock market.
For banks and businesses, aggressive liquidity tightening can also make naira funding more expensive.
CBN keeps tightening the liquidity tap
The latest N4.72 trillion OMO absorption adds to the N7.18 trillion the CBN reportedly mopped up through OMO operations in July, showing how central liquidity management has become in the apex bank's current monetary strategy.
The decision to broaden access to OMO securities has also expanded the pool of potential investors, increasing the CBN's ability to absorb excess funds, Legit.ng findings showed.
Source: Twitter
With another N700 billion Treasury Bills auction scheduled and about N2.25 trillion in OMO maturities expected, liquidity management is likely to remain a major feature of Nigeria's fixed-income market as September approaches.
For investors, the message is clear: nearly 20 per cent yields are powerful enough to attract substantial naira funds. For the CBN, the challenge is ensuring that this aggressive liquidity management supports price stability and the naira without creating excessive pressure elsewhere in the economy.
Dollar crashes to N1,343, CBN boosts FX liquidity
Legit.ng earlier reported that the recent naira appreciation, which has notably reached a five-month high against the US dollar at N1,343.32, follows significant reforms by the Central Bank of Nigeria aimed at boosting forex liquidity.
This remarkable shift not only showcases the naira's resilience but also raises hopes for stability in a market that has long faced volatility, inviting readers to explore the implications for households grappling with rising food prices amid easing headline inflation.
Source: Legit.ng
