Follow Us on Google
By Chinwendu Obienyi
Economic analysts have warned the Federal Government and the Central Bank of Nigeria (CBN) against using Open Market Operations (OMO) bills as means to attract foreign investors, stating that could affect the apex bank’s balance sheet.
This is coming after the CBN on August 10, auctioned its first OMO bills since 29 December 2022. Despite the high subscription level relative to the offer (Bid-offer ratio: 2.1x), the stop rate averaged 12.49 per cent across the 96-day (10.00 per cent), 187-day (12.98 per cent), and 362-day (14.49 per cent) bills – exceptionally higher than 8.50 per cent mean level at the December 2022 auction.
The issuance came on the backdrop of persistent pressure on the Naira, evidenced by the widening official-parallel rates divergence, despite the CBN reform moves. According to analysts at Afrinvest, the resumption of OMO sales could be assumed to be a return to orthodox use of the tool for liquidity management.
However, market sources suggest the auction was open to FPI which indicates continued use of OMO bills for attracting FX flows and boosting dollar liquidity. Analysts at Cordros Research said, this auction represents one of the short-term fixes for the CBN to attract FPIs into the market amid concerns that the Treasury bills yields are too low to attract foreign investors.
They said, “Whilst we are cautiously optimistic that active OMO operations with competitive interest rates will complement recent FX reforms and may be a short-term fix needed to bring FPIs back to the FX market, the preceding suggests a bifurcation of interest rates where rates are high for foreign investors (OMO bills) but low for domestic investors (Treasury bills) following the DMO’s efforts to keep borrowing costs low. Moreover, bringing back OMO as a tool for attracting foreign investors takes us back to the unorthodox monetary policy era and will come at a considerable cost to the CBN’s balance sheet”.
Corroborating them, analysts at Afrinvest, said, attempts to lure offshore investors via OMO issuances could be challenging and costly given that real interest rates in advanced markets are improving in contrast to worsening negative real interest in the domestic market.
“Consequently, we recommend clear policy communication, reduction of FX demand management and the limited interference with the willing buyer and willing seller model as key tools to improving confidence in the FX market. Furthermore, by allowing interest rates to find their fundamental levels the allure of Naira assets would dissuade dollarization and attract foreign participation”, they said.
Si
