OMO sales by CBN in H1 drop by 48.5% to N1.8trn
Open Market Operations(OMO) sales by Central Bank of Nigeria (CBN) dropped by 48.5 percent in half year of 2021 to N1.8 trillion as against N3.49trillion reported in first half of 2020.
OMO is basically designed to be a short-term market instrument that the CBN uses to control the supply of money in the economy. Whenever the CBN believes the inflation rate is high due to increased money supply it sells OMO to mop-up excess liquidity in the system.
Our correspondent gathered an OMO sale by CBN in January was N413.4billion but it increased to N746billion in February 2021.
Analysts at Cordros securities in a report stated that, “a significant uptick in OMO yields at the first auction in February added another layer of pressure to the existing volatility in the market.
“At the February 4, 2021, OMO primary auction, the CBN more than doubled the yields on instruments sold, with the average yield settling about 467basis points higher at 8.5per cent despite the auction being undersubscribed and the CBN allotting c. 90percent of the total amount offered on each tenor.
“As a result, the stop rate of the longest dated instrument (362-day) closed at 10.1percent (previous stop rate: 5.7percent) – the highest level since the April 30, 2020 auction (12.6per cent).”
However, OMO sales in March dropped by 60.5 per cent to N285billion and it also dropped further to N206.8billion in April.
In addition, OMO sales by CBN for May and June 2021 was N214billion and N210billion respectively.
The CBN had suspended Nigerian corporate and individuals access to the OMO market, also, banks were not allowed to buy Treasury bills (T/bills) on behalf of borrowing customers.
Analysts stated that CBN decision was to form moral coercion on the banks to increase their loans to the private sector.
The head of research, PanAfrican Capital Holdings Ltd, Moses Ojo had stated that CBN’s weak activities in OMO market was due to COVID-19 lockdown, stating that banks were concerned about lending to real sector as demanded by the regulating body.
He explained further that, “It was weak activities in the money market last year. OMO market shouldn’t be an exception. Banks were focused on lending to real sector during the lockdown.
“However, it is believed that an increase in bank credit to the private sector will lead to increased growth and employment. The banks are wary to rapidly grow risk assets at a time of high default risk.”
The CEO, Enterprise Stockbrokers Plc, Rotimi Fakayejo said the decreased OMO sales was due to weak economy and policy stance of the CBN.
He noted that the weak OMO sales impacted on the capital market as investors renewed interest in fundamentals stocks on the Nigerian Stock Exchange (NSE).
His words, “OMO is one of the instruments CBN used in controlling money in circulation, making sure the rate of inflation is reduced. Investors will always go to where it is easy for them in terms of reaping their investment, be it short-term or long-term.”
Analysts at Financial Derivates Company Limited (FDC) had stated that the banned of corporates and individuals would give room for foreign portfolio investors, as OMO auctions are mostly oversubscribed.
“However, FPI is hot money and is not sustainable for the economy. It could fizzle out at the slightest sniff of crisis. Could trigger currency weakness as investors shift to the foreign exchange market.
“To increase activities in the stock market, investors are attracted to high returns and the performance of companies listed on the NSE is a function of macroeconomic variables,” they added.
