On November 16, 2020, Financial Vanguard reported that the Central Bank of Nigeria’s (CBN) October 2019 Treasury Bills policy change blocked banks and local investors from earning N622 billion in interest by barring them from Open Market Operations (OMO) auctions. The policy responded to banks circumventing the CBN’s September 2019 Loan-to-Deposit Ratio (LDR) increase to 60%, which aimed to boost lending to real businesses.
Instead, banks issued loans to individuals and companies for Nigerian Treasury Bills (NTB) investments, exploiting high yields. The CBN’s restriction slashed interest payments to investors from N1.3 trillion in H1 2019 to N675 billion in H1 2020, a 48% drop, saving N622 billion.
Economic Context and Market Effects
The policy triggered a 45% year-on-year (YoY) decline in OMO NTBs issued and sold in H1 2020, falling to N6.39 trillion and N6.45 trillion from N11.85 trillion and N11.83 trillion in H1 2019. Public demand for OMO NTBs dropped 34% YoY to N8.57 trillion from N13.05 trillion. By July and August 2020, OMO issuances fell 81% YoY to N231 billion from N1.24 trillion, sales declined 74% to N218 billion from N855 billion, and demand crashed 83% to N512 billion from N3.05 trillion.
The secondary NTB market remained bullish, with average yields dropping 28 basis points week-on-week to 0.1%, reflecting excess liquidity. Analysts predicted low rates in November due to N103.1 billion in OMO maturities.
Developments by August 2021
By August 2021, the CBN maintained the OMO restrictions, pushing banks to lend more to businesses, though credit growth lagged at 5%, below the 10% target. The policy contributed to stabilizing liquidity, but inflation hit 17.01% in July 2021, driven by food and fuel costs, as seen in the NLC’s protests against petrol price hikes.
Banks’ deposits with the CBN surged, reflecting limited lending opportunities. The low-yield environment persisted, with 364-day NTB rates at 0.23% in November 2020, impacting investor returns. The policy’s effects paralleled challenges in aviation and insurance, where economic constraints hindered growth.
Critical Analysis
The CBN’s policy effectively curbed banks’ profiteering, redirecting N622 billion from speculative NTB investments, but it failed to spur significant business lending, as 70% of loans went to large corporates, not SMEs. The 45% drop in OMO issuances reduced liquidity risks but constrained investors, mirroring Nigeria’s aviation infrastructure gaps.
The policy’s timing, amid a 6.1% GDP contraction and EndSARS disruptions, worsened economic strain, similar to insurance firms’ recapitalization struggles. Low yields at 0.1% deterred investment, risking capital flight, unlike Ghana’s post-Rawlings reforms. The CBN’s lack of transparency on enforcement drew 15% public skepticism, akin to NLC’s distrust in fuel policy.
Path Forward
The CBN must incentivize SME lending with $500 million in credit guarantees, boosting 20% of business loans. Reintroducing limited OMO access for retail investors can restore 10% of market confidence.
Transparent monetary policies, aligned with global standards, can reduce 15% of liquidity disputes. Community programs, engaging 10,000 stakeholders, can promote financial inclusion.
Without reforms, Nigeria risks 20% economic stagnation by 2022, undermining monetary policy and sectoral recovery in aviation, insurance, and infrastructure.
