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By Chinwendu Obienyi
The Central Bank of Nigeria (CBN) intensified its liquidity-tightening campaign in the month of January, selling N8.5 trillion ($5.7 billion) of Open Market Operation instruments to banks and investors, one of the most aggressive monthly mop-ups in recent years as it seeks to curb inflationary pressures and stabilise the naira.
OMO auctions are a standard tool in the monetary policy armoury. By issuing interest-bearing securities to banks and investors, the central bank effectively drains excessive cash from circulation. When too much money is chasing limited goods and dollars, prices rise and the naira comes under pressure.
According to Afrinvest’s monthly market report for the month under review, the heavy OMO issuance was a key driver of negative system liquidity, with average balances closing the month at -N2.4 trillion.
The liquidity deficit persisted despite sizeable inflows from maturing OMO bills and primary market repayments, underscoring the CBN’s determination to maintain restrictive monetary conditions.
“OMO sales, alongside N2.9 trillion parked at the Standing Deposit Facility (SDF) and N3.7 trillion in primary market sales, outweighed inflows of N5.6 trillion from OMO maturities, N2.8 trillion from maturing treasury instruments, and limited access to the Standing Lending Facility. The net effect was a sustained tightening of cash available to commercial banks.
Nonetheless, cost of interbank credit remains elevated, evidenced by the OPR and OVN rate which advanced 3.6 ppts apiece m/m to 26.1 per cent and 26.4 per cent, respectively”, the report said.
For the CBN, the strategy reflects a return to orthodox monetary management after years of excess liquidity driven by fiscal monetisation and development finance interventions. By aggressively issuing high-yield OMO bills, the apex bank has been able to absorb surplus naira liquidity, while reinforcing its commitment to price stability and exchange-rate discipline.
Specifically, the apex bank announced last week (Tuesday) that it offered N600 billion across the 210-D and 350-D maturities. The bank revealed that total subscriptions reached N4.80 trillion, yet no sales were made. After announcing another OMO auction on Thursday, offering about N600 billion across the 208-D and 348-D maturities, demand remained strong with total subscriptions reaching N5.92 trillion. The CBN ultimately allotted N3.78 trillion across both maturities at stop rates of 17.02 per cent and 17.25 per cent, respectively.
Commenting on this development, a senior treasury official at a tier-1 bank said the scale of OMO sales had fundamentally altered money-market dynamics. “With liquidity this tight, banks are forced to prioritise funding and balance-sheet management over asset growth. Risk-free OMO yields remain more attractive than extending long-term private-sector credit”, he said.
Beyond domestic liquidity management, the policy has important implications for the country’s FX market. High OMO yields are widely viewed as a tool for attracting foreign portfolio inflows, particularly from offshore investors seeking carry trade opportunities amid elevated global interest rates.
Economists say the CBN’s approach reflects a careful balancing act between macroeconomic stabilisation and growth risks. Head of Research, FSL Securities, Victor Chiazor, said the January OMO sales also highlight how the CBN is using market-based tools rather than administrative controls to transmit monetary policy.
“Unlike earlier periods marked by direct intervention in credit allocation, the current framework relies on pricing liquidity through auctions and allowing rates to reflect scarcity. Still, the effectiveness of the strategy will depend on complementary fiscal discipline and improved dollar supply from oil exports and non-oil inflows.
Without these, I fear that liquidity tightening alone may not deliver durable exchange rate stability”, Chiazor said.
Echoing the same sentiment, Professor of Economics and Monetary specialist, Sheriffdeen Tella, noted that sustained liquidity tightening through OMO auctions must be monitored carefully to avoid credit contraction effects.
“While OMO auctions are a necessary tool for inflation control, they can cumulatively lead to tighter bank credit conditions if not complemented by broader monetary and fiscal coordination,” Tella said.
Chief Economist, SPM Professionals, Paul Alaje, emphasized the dual role of OMO auctions in both managing inflation and supporting exchange rate stability. He stressed that withdrawing large sums of liquidity can help reduce speculative pressure on the naira, particularly in periods when demand for foreign exchange is strong.
“With high yields on OMO bills and robust demand from banks and institutional investors, the CBN is leveraging its monetary toolkit to influence liquidity and FX market dynamics. However, this also underscores the need for calibrated credit flow to the real sector so that the liquidity squeeze does not unduly stifle economic activity”, he explained.
For now, the message from the CBN is unambiguous. By draining N8.5 trillion in a single month, policymakers have signaled their willingness to tolerate tight financial conditions in pursuit of macroeconomic stability.
Markets are likely to remain cautious, with banks, investors and corporates recalibrating expectations around funding costs, credit availability and interest-rate direction in the months ahead.
