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CBN suspends OMO to spur lending

By BusinessNews Staff on October 31, 2015

The Central Bank of Nigeria (CBN) recent decision to cease its regular mop-up of liquidity from the system, mostly through its open market operations (OMO) instrument, has released a lot of liquidity into the financial system.

This is evident in the Nigerian Interbank Offered Rates (NIBOR), especially the overnight tenor, which has fallen significantly. The overnight tenor closed at 6.175 per cent on Thursday. The yield on a 90-day naira-denominated treasury bill has fallen from 14.9 per cent in August to 9.3 per cent recently. Having been essentially flat for at least five years, the naira yield curve now has a positive slope.

These, together with the a six per cent reduction in commercial banks’ cash reserve requirement from 31 per cent to 25 per cent by CBN last month, according to analysts, have more than offset the reduction in liquidity resulting from the implementation of the Treasury Single Account (TSA) initiative.

The move, according to analysts was also clearly to make banks increase lending to critical sectors of the economy so as to stimulate growth.
Analysts at City Stockbrokers Limited, stated in a report titled: “Little impact from interest rate falls,” obtained yesterday, described the development as an experiment by the central bank to see what commercial banks will do with extra liquidity.
“Will banks now increase loans to the real economy? Our sense is that they will wait, give deteriorating growth and credit conditions. If extra liquidity means extra demand for imports, and renewed pressure on the currency, then we may see this policy reversed.
“Interest rates across the money market and the government debt market have 0fallen precipitously over recent weeks. The driver is easily identified – a surge of liquidity resulting from the CBN’s decision to not roll-over open market operation securities that have matured over recent weeks,” CSL stated.
The report pointed out that essentially; the CBN has been in easing mode from a quantitative perspective, adding that the banking sector regulator has been increasing the quantity of money in the system, while keeping the cost of money (the monetary policy rate) constant.
“What is the effect on financial markets and on the economy as a whole? Much will depend on the longevity of this quantitative easing but the short answer is that the effect will be muted, we believe. Ordinarily, an increase in the quantity of money in the system and a resultant fall in interest rates would be negative for the currency as it reduces the cost of shorting the naira.
“However, the restrictions on accessing foreign currency which the CBN has put in place could prevent this additional liquidity from finding its way into the forex market. Indeed, banks requesting foreign currency need to have a customer with a legitimate need for foreign currency underpinning the request.
“This requirement precludes any speculative purchase of hard currency. At the margin, lower interest rates will make Nigerian debt less attractive to foreign bond holders. However, our existing projections for the currency include that assumption that there are likely to foreign bond outflows in any case,” it added.
But it stressed that banks that are uncertain of how long additional liquidity will be forthcoming, are unlikely to use the recent increases materially to grow lending to the private sector.