Since Olayemi Cardoso became governor, the Central Bank of Nigeria has issued N1.5 trillion in Open Market Operation (OMO) bills in an effort to control inflation and strengthen the naira, whose sharp depreciation has caused economic instability, according to a New Chronicles research.
Most of the bids were for long-term bills with maturities ranging from 180 to 365 days.
Although there have been six auctions throughout Cardoso’s tenure, only five of them have raised the N1.5 trillion that has been raised to date, according to people with knowledge of the subject. The Dec. 22, 2023 auction did not result in a sale because investors placed too high of a bid.
Additionally, according to sources, there were optional bids in November.
To lessen excess liquidity in the economy, the International Monetary Fund (IMF) has suggested that the CBN boost OMO bills by up to N2 trillion over a year.
“Keep taking out excess liquidity with short-term instruments (repos or OMOs).” The first objective needs to be to withdraw the leftover N800 billion in surplus reserves, and potentially as much as N2 trillion in the upcoming year, according to the IMF.
Three OMO bill auctions this year have seen the CBN scoop nearly N1 trillion in cash.
Cardoso stated in an interview conducted last week that the CBN’s inflation-targeting strategy is to keep inflation under control at 21.4%.
The National Bureau of Statistics reports that the nation’s headline inflation rate increased to 29.90 percent last month from 28.92 percent in December.
According to the CBN, the nation’s money supply rose from N64.35 trillion in June 2023 to N92.87 trillion in January 2024, a 44.32 percent rise in just six months.
The total amount of money in circulation in an economy is referred to as the money supply. It encompasses both tangible money (such as coins and banknotes) and other kinds of bank deposits that can be easily exchanged for cash.
“To achieve price stability, foster market confidence, and positively influence consumer behavior, the adoption of the inflation-targeting framework involves clear communication, use of monetary policy instruments, and collaboration with fiscal authorities,” he stated.
Recent data from the CBN indicates that the total money supply rose from N72 trillion in November to N78.7 trillion in December.
The CBN uses OMO, a liquidity management instrument, to regulate the amount of money in circulation. To absorb extra funds when it sees them in the system, the central bank offers OMO bills, also known as CBN bills, to investors via the banks.
The CBN’s primary mission of maintaining price stability would be compromised by an overabundance of money in circulation, which would lead to an increase in Nigeria’s already high rate of inflation as the country’s overall demand for goods and services would surpass supply.
Interest rate control, according to Cordros fixed-income expert Ayooluwade Ogunwale, is the CBN’s main weapon against inflation.
“Some unconventional means are providing financial aid to specific sectors like we have some targeted agricultural finance incentives that should help prop up local production and put downward pressure on prices,” he went on to say.
He claimed that because Nigeria’s inflation is driven by costs, the CBN’s attempt to control it by removing N2 trillion using OMO bills might not be successful.
“I am part of the group that believes that rather than being driven by demand, our inflation is more cost-driven. However, given how reliant on imports we are, we cannot ignore the effects of the current devaluation of imported goods,” he stated.
Reducing the amount of liquidity accessible to banks is one strategy, according to Ogunwale, to control the speculative actions of certain foreign exchange dealers. “For this reason, I support the policy of decreasing bank liquidity and increasing the value of naira assets.”
A portfolio manager in Lagos named Umarhu Mustapha stated that to combat inflation, interest rates must be raised.
“Investors are encouraged to make investments when interest rates rise, which also lowers the amount of money in circulation. Inflation decreases when the money supply is decreased,” he claimed.
