CBN excludes individuals, other investors from buying OMO bills

The Central Bank of Nigeria (CBN) has barred individuals and local non-banking institutions from investing in its high-yielding treasury bills on sales at the Open Market Operations (OMO), a move designed to stimulate bank loans for purposes other than market speculation.

The two types of investors are excluded from buying OMO bills, which are short-term central bank securities, the CBN said in a circular to commercial lenders.

“We don’t want to leave room for arbitrage,” central bank spokesman Isaac Okorafor said in a text message, confirming the authenticity of the two letters. It will discourage banks from giving loans to “speculators” who want to buy government securities instead of investing in the “real economy.”

The measures are in line with a wider policy to penalize banks that don’t boost lending, according to Okorafor. He said pension funds have also been excluded from purchases.

After initially limiting the ban to auctions, the central bank sent another letter on Thursday saying the prohibition extended to the secondary market as well.

“The central bank is trying to shrink the balance sheet without spooking foreign portfolio investors,” said Omotola Abimbola, an analyst with Lagos-based Chapel Hill Denham Securities Ltd.

“It would have been a free arbitrage for banks if they didn’t ”include secondary market operations, he said.

OMOs, which typically have maturities of less than a year, were originally used by the central bank to control liquidity and mainly bought by local lenders. But they have been opened to others in the past two years to bring in hard currency needed to keep the naira from depreciating, becoming the main instrument for foreign carry traders.

Global investors have been attracted to naira bonds by yields of about 15 percent and a stable currency, which have made the Nigerian carry trade one of the most lucrative in emerging markets this year.

Africa’s top oil producer is struggling to jump-start an economy that’s yet to fully recover from the 2014 crash in crude prices. Growth will probably be 2.3 percent this year, according to a Bloomberg survey of economists, one of the lowest levels on the continent.

The central bank’s sales of OMO bills ballooned to $2.4 billion last year from $600 million in 2016, according to Citigroup Inc. It issued $1.4 billion in the first eight months of 2019, the Wall Street bank estimates.

There are around $40 billion of outstanding OMOs, roughly half of which are owned by foreigners, Simon Kitchen, a strategist at Cairo-based investment bank EFG Hermes, said in a note on Oct. 23.

“The focus now is more on containing the OMO bill stock and having checks in place,” said Samir Gadio, head of Africa strategy at Standard Chartered Plc research team in London.

-Global Financial Digest