CBN tightens liquidity tap with N7.6trn mop-up

…As apex bank focuses in reining in inflation

… Money supply rises to N107trn

The Central Bank of Nigeria (CBN) sold a total of N7.6 trillion in Open Market Operation (OMO) in the first nine months of 2024 as part of its ongoing efforts to control excess liquidity in the financial system.

This marks a significant increase from N150 billion issued over the same period in 2023, according to data from the CBN.

The move is a clear indicator that the apex bank has been actively mopping up excess liquidity from the Nigerian financial system, analysts have observed.

OMO sales are used by the CBN to control the money in circulation. By adjusting the volume of money circulating through these sales, the CBN can influence interest rates, which in turn affects investment, consumption, and economic growth.

Despite these efforts, money supply (M3)—a broad measure of the total amount of money in the economy—rose to an all-time high of N107.2 trillion in August 2024, according to CBN data.

Tilewa Adebajo, chief executive officer of The CFG Advisory, described the development as a dilemma.

Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, said: “It’s just a mechanism for the CBN to reduce the volume of funds in circulation and reduce inflation.”

He attributed the rise in money supply to the activities of the fiscal authority.

“Unfortunately, while the CBN is adopting a contractionary stance, the fiscal authority has an expansionary strategy,” he added.

In September 2024, the CBN raised its benchmark interest rate, known as the Monetary Policy Rate (MPR), by 50 basis points to 27.25 percent. This marked the fifth consecutive rate hike this year, as the bank seeks to combat inflation and stabilise the naira.

Nigeria’s headline inflation rate increased to 32.70 percent in September 2024, up from 32.15 percent in August, marking a 0.55 percent month-on-month rise, according to the National Bureau of Statistics (NBS).

“The Monetary Policy Committee (MPC) members believe that maintaining a hawkish stance will help reduce the negative real interest margin. This approach could enhance Nigeria’s investment appeal and potentially attract foreign capital inflows to support the stability of the naira,” analysts at FBNQuest noted.

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By reducing the volume of money circulating in the economy through OMO issuances, the CBN aims to curb inflation, which is the sustained increase in the general price level of goods and services.

“Excess liquidity can fuel inflation as it leads to increased demand for goods and services, outstripping the supply and driving up prices,” explained a Lagos-based investment analyst, who pleaded anonymity.

The CBN uses OMO sales to support the exchange rate of the naira. By reducing the supply of naira, the currency becomes scarcer, increasing its value relative to other currencies. This strategy helps to prevent excessive depreciation of the naira, analysts say.

At the foreign exchange market, the naira has been relatively stable, exchanging at N1,600.78 per dollar on Friday at the Nigerian Autonomous Foreign Exchange Market (NAFEM), Nigeria’s official forex window. On the parallel market, also known as the black market, the naira traded at N1,720 against the dollar on the same day.

Read also: CBN sells $543.5m to stabilise FX market

In the second quarter of 2024, total foreign exchange inflows into the Nigerian economy decreased by 4 percent quarter-on-quarter (q/q) to $23.4 billion. However, on a year-on-year (y/y) basis, the total FX inflow increased by 41 percent. The q/q decline is notable, following a strong rebound in the previous quarter, which suggests a potential normalisation in inflow patterns.

FX outflows from the economy also declined modestly by five percent q/q to $9.8 billion, resulting in a net FX inflow of $13.6 billion, down 3 percent q/q. Despite the decline, this figure represents the second-highest net inflows since the third quarter of 2021, following the $14.0 billion recorded in the first quarter of 2024.

The primary driver of the q/q reduction in overall inflows was a decrease in FX inflows from autonomous sources, which fell by $1.4 billion or 9 percent to $14.9 billion. This suggests some volatility in this segment of the market. In contrast, FX inflows through the CBN increased by five percent q/q to $8.5 billion, highlighting the central bank’s ongoing role in managing FX liquidity.