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Nigeria T-bill restrictions risk curbing liquidity, stoking inflation

By Oluwatosin Adeshokan
Posted on Monday, 18 November 2019 09:54

Nigeria's Central Bank Governor Godwin Emefiele. REUTERS/Afolabi Sotunde

In a bid to boost lending, Nigeria’s central bank in October banned private individuals and local non-banking firms from buying short-term central bank securities through Open Market Operations (OMO).

Nigeria’s local-currency bond yields have dropped into single digits since the central bank announced the new rules. Reduced liquidity in the T-bills market and higher inflation are among the possible consequences.

OMOs are issued by the central bank (CBN) for monetary policy management to control liquidity. In recent years, the market had been opened to foreign investors to generate foreign exchange to maintain the value of the naira, but now, only foreign traders are allowed to hold OMOs.

Pension funds have also been excluded from purchases.

Real market lending

After struggling to resuscitate the Nigerian economy that is still suffering from the 2016 recession, the CBN at the end of September increased the loan-to-deposit ratio of banks from 60% to 65%. Experts believe that these loans are intended to stimulate manufacturing within the Nigerian economy. There are a lot of new digital players in consumer loans, but the hope is that banks will enter the space to drive interest rates down and stimulate the economy.

Banks previously used the treasury bill market to keep their cash reserves high, and this had the effect of making loans harder to justify.

One risk leads to another

But cutting the market size for OMOs to just banks and foreign corporates reduces the liquidity of the market.

  • “In the event that foreign investors need to leave and get their money, the rates that might be given to them will be reduced because the local banks might have a lot of the power in the interim,” according to Seun Oyajumo, an investment analyst in Lagos.
  • “Take away the liquidity of secondary markets and OMOs will not be as attractive to the foreign investors looking forward.”
  • “The CBN needs to look properly at the policy to make sure there is not so much money in the economy that inflation begins and the state begins to go downhill from there,” Oyajumo argues.

John Ashbourne, senior emerging markets economist at Capital Economics in London, agrees.

  • Ashbourne predicted in August that inflation would be persistently quite high and that this will undermine the spending power of ordinary Nigerians.
  • The costs of inflation, he says, outweigh the benefits of increased lending which are limited to specific actors in the economy – while high inflation affects everyone.

Charles Robertson, global chief economist at Renaissance Capital, says that a market-friendly option would be for the government to reduce its budget deficit and so force banks to lend to someone other than the government.

  • In the longer term, lower inflation would do the job of cutting interest rates and encourage lending and borrowing, he argues.

Bottom Line: The blunt tool of regulatory bans on T-bill purchases risks reducing market liquidity and prompting sharply higher inflation.

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