CBN To Phase Out $40b OMO Bills Market

The Central Bank of Nigeria (CBN) will soon end the Open Market Operation (OMO) Bills sales to investors. The policy shift could hurt the market with its over $40 billion investment, according to findings.

The market for OMOs had grown to about $40 billion by the end of 2020, data from Cairo-based investment bank, EFG Hermes, with foreigners holding about a third.

CBN Director, Monetary Policy, Hassan Mahmud, said plans to phase out the instruments “once current obligations have been redeemed”. Mahmud, who spoke in an interview aired during an online conference on Tuesday, didn’t give a time frame for the policy implementation.

Mahmud, said the cost of liquidity management was getting too high and issuance of OMO bills should be a transaction between the central bank and commercial lenders.

“It’s not supposed to be for the public, but along the line the transition broke and investors who were non domestic were investing in OMO,” he said.

The debt sales handed foreign investors some of the best carry returns in Africa, with many of the investors borrowing from low interest markets, and investing in Nigeria where they got nearly 30 per cent returns in dollar terms.

The OMO offerings were introduced to help stabilize the naira following the oil-price collapse in 2015.

The CBN had previously barred individuals and local non-banking firms from buying high-yielding central bank bonds, a move designed to stimulate bank loans for purposes other than market speculation.

The two types of investors are excluded from buying open-market operations, which are short-term central bank securities, the Abuja-based regulator said.

Though the sales helped to shore up the currency, the debt has become too burdensome to sustain as foreigners snapped up securities that offered carry traders.

The CBN has reduced OMO issuance by 61 per cent in the first two months 2021 compared with the same period last year, according to data compiled by Bloomberg.

OMOs, which have maturities of less than a year, were created to mop up excess liquidity in the banking system, but had been opened to foreign investors to attract dollars since the 2015 oil-market crash.

In October 2019, the CBN restricted OMO sales to banks and offshore investors, barring participation of domestic institutional investors and non-banking firms. That distorted the market for Nigeria’s short-term debt, with yields on Treasury bills collapsing.

OMOs maturing in February 2022 yielded around 8.5 per cent on Tuesday, compared with three per cent for one-year Treasury bills in the secondary market.