The pursuit of price stability and by extension, economic stability is behind the persistent liquidity mop up in the last 60 days, which has reached N1.3 trillion.
The Central Bank of Nigeria (CBN), has in the period under review, raised its frequency in using the Open Market Operations (OMO) auctions, like treasury bills to control the quantity of money in circulation.
Consequently, the moves have also led to varying degrees of impacts on the exchange rates, interest rates, inter-bank lending rates, inflation and foreign direct investments.
The interventions, described by traders as an aggressive efforts to push interest rates higher and attract foreign capital — for eign portfolio and direct investments — is only N40 billion short of the total value of auctions throughout the second half of 2015.
According to an economist in one of the nation’s top five banks with international presence, it shows CBN’s awareness of the declining fortunes of the economy and its readiness to stimulate foreign investments’ inflow to the country and reduce external sector pressures.
At the weekend, the two interbank lending instruments- Open Buy-Back (OBB) and Overnight rates, rose further to 23 per cent and 25.6 per cent as system liquidity closed the week at N70.6 billion.
The rates had started Tuesday’s trade at 7.2 per cent and 8.2 per cent for OBB and Overnight respectively, but sustained a rising profile all through the week as a result of OMO auctions.
Specifically, CBN auctioned N205 billion by Tuesday, while another OMO auction of N236.1 billion was floated and cleared at a marginal rate of 18.5 per cent on Thursday.
Also, in a note from Afrinvest Securities Limited over the weekend, “although tight monetary policy stance has remained largely predominant since November 2011, the recent policy thrust of the CBN suggests the aggressive nature of tightening for which a number of criticisms have been generated from both trade and industrial circles as well as political space.”
Shorter term rates in the secondary fixed income market have risen to 15.7 per cent on average from below 12 per cent in May this year, with discount yields on 364-day treasury bills instrument trading very high.
However, for operators in the manufacturing sector, the weakened consumer spending power and foreign exchange shortages constraining demand and stifling profitability, have kept them at the receiving end.
Besides, the prospect of a tighter monetary policy and the consequences on borrowing cost and consumer spending decisions have added to the headwinds facing the sector.
CBN’s monthly survey- Purchasing Managers’ Index (PMI), showed the industrial sector is already in a 15-month long recession.
Manufacturing has been below 50 points– the threshold separating activity expansion from contraction – since the start of the year.
CBN had last month increased benchmark rate riding on the back of its pursuit of price stability, as well as reduce the existing negative rate of -4.5 to -2.5.The move was expected to attract foreign investments too.
“CBN appears to be comfortable with compensating exchange rate risk through interest high rate, hence the gravitation towards aggressive liquidity tightening to force shorter term rates higher and attract foreign capital.
“To compensate for the foreign exchange risk, the CBN’s FX futures contracts are being priced below market rate, while the apex bank continues to intervene in the FX spot market to guide Naira trading band.
“Despite the negative impact of higher interest rate on consumer and real sector investment decisions, the economy appears to be a lot more sensitive to foreign exchange stability than it is to increase in interest rate.
“The robust GDP growth figures recorded in the last era of aggressive policy tightening (between 2011 and 2012) further supports this. This explains the willingness of the CBN to take a gamble on tightening policy to attract portfolio inflow, with the expectation that feedback on growth will be limited, a financial analyst, Ayodeji Eboh, noted.
A further analysis showed that investors have continued to display higher appetite for shorter-term treasury instruments due to higher attractive yields relative to longer tenured instruments.
Average treasury-bills rate which opened the week at 17 per cent, rose to 17.7 per cent and eventually closed at 18.1 per cent, while the nine-month and one year tenors remain the most attractive, with rates closing as high as 19 per cent and 22.4 per cent respectively.