CBN says not scrapping use of OMO Treasuries, but questions persist
By Oludare Mayowa
Reports in some media channels on Wednesday are quoting an unnamed Central Bank of Nigeria (CBN) official denying a report that the regulatory bank was about to scrap the Open Market Operations (OMO) treasury bill sales.
According to the reports, the earlier report by a foreign news agency, which was also published by this medium that it was “preparing an end to an era of debt sales’ in reference to the OMO bill was a misrepresentation of the position of the bank.
The CBN Director of Monetary Policy, Hassan Mahmud was quoted as saying at a virtual conference that OMO will soon be phased out by the regulatory bank “once current obligations have been redeemed.”
The market for OMO bills had grown to about $40 billion by the end of last year, according to Cairo-based investment bank EFG Hermes, with foreigners holding about a third.
The CBN spokesman, Osita Nwanisobi said the report is “Not true’ in his response to questions by our correspondent on the report, and he further stated that Mahmud “never made any comment in that regard.”
But the questions in the minds of many observers of the market is if truly the CBN director was misquoted on the planned phase-out of the debt instrument or he spoke prematurely on the matter?
Was there any plan by the CBN to scrap the use of OMO Treasuries as liquidity and investment instrument or not? Why would the CBN want to scrap the instrument, is it because the cost of using OMO as a liquidity management instrument is getting too high for the regulatory bank?
What other options is the CBN proposing to replace the instrument in case it eventually scrap its use as quoted by the report?
On the other hand, if what Mahmud was quoted as saying was not true as alluded to by the regulatory bank’s spokesman, what are the motives for such a report on the part of the foreign news agency?
Though the CBN has denied the report, the market may have been sent the wrong signals by the report and this could also lead to further interrogations of the CBN position vis-a-vis the foreign news agency report on the issue.
The coming days will be an interesting revelation on the truth behind the report or its denial.
OMO is one of the highest paying investments in fixed income assets, hitherto used by the regulatory bank to attract foreign portfolio investors to bring in their dollars into the country.
The regulatory bank first launched trading in OMO bills in 1994 to help provide secondary securities market for its Treasury bills in the wake of the introduction of Discount House.
The OMO platform was also introduced to ensure market driven liquidity management mechanism by the CBN as a replacement for stabilisation securities often used to curtail excess liquidity in the banking system in the 1990s.
However, after most of the Discount Houses went into extinction, the CBN continues to use the OMO bills as liquidity management instruments and alternative investment channels for banks, institutional investors, and high net worth individuals.
In a bid to boost lending, the CBN in October 2019 barred private individuals and local non-banking firms from buying its OMO securities, leaving the space for only offshore Portfolio Investors.
The regulatory bank followed up with the introduction of mandatory lending of 65 per of banks Loan-to-deposit ratio to the productive sector of the economy.
This policy was designed to help banks divert the funds being invested in the OMO and other lucrative fixed income assets into lending to the productive sector and boost economic growth.
On the back of dwindling foreign exchange inflow, the CBN had opened the OMO market to foreign investors to attract foreign exchange to maintain the value of the naira.