In a bid to stimulate economic growth worsened by unprecedented rise in prices of goods and services, the Central Bank of Nigeria, CBN, reduced its cash mop up operation by 82 per cent to N150 billion in the nine months ending September 30th, 2023 from N830 billion in the corresponding period in 2022.
As a result, the banking industry enjoyed a 46 per cent increase in average opening balance of idle cash during the period.
As part of its money supply management function, the CBN occasionally mop up or inject cash into the banking system through the sale or repayment of Open Market Operations, OMO, Treasury Bills (TBs).
The CBN sells OMO TBs to reduce money supply in the economy and with a view to curbing inflation.
But when the CBN wants to increase money supply to spur economic growth, it repays the maturing OMO TBs with interests to the banks and the investors.
However, it is not clear if the drastic reduction in its cash mop up measures have succeeded in stimulating economic growth over the past nine months as inflation maintained steady upswing while gross domestic product, GDP, has been sluggish.
Financial Vanguard findings from the CBN data on OMO TBs transactions showed that the apex bank sold N150 billion worth of OMO TBs in 9M’23, down from N830 billion sold in 9M’22.
Also the amount of matured OMO TBs repaid by the CBN fell by 82 per cent to N313.52 billion in 9M’23 from N1.741 trillion in 9M’22.
Consequently, the banking system recorded net cash injection of N164 billion from OMO TBs in 9M’23, down from N911 billion in 9M’22.
However, due to the sharp decline in cash mop up by the CBN, the banking industry enjoyed a 46 per cent increase in average daily cash balance which rose to N407.13 billion in 9M’23 from N214.87 billion in 9M’22.
In the same vein, the average daily cash balance rose by 31 per cent last week, boosted by inflow of N1.1 trillion that the Federation Accounts Allocation Committee, FAAC, allocated to the three tiers of government the previous week.
In response, interest rates in the interbank money market fell, on the average, by 170 basis points from the previous week.
Data from FMDQ Exchange showed that interest rate on Overnight lending fell to 1.7 per cent at the end of last week from 3.4 per cent the previous week.
Similarly interest rate on Collateralised borrowing (Open Buy Back, OBB) fell to 2.7 per cent last week from 2.7 per cent the previous week.
With the CBN scheduled to inject N10 billion via matured OMO TBs, analysts projected that further boost in the amount of idle cash in the system hence interbank interest rates are expected to remain low.
In their review of the financial market, analysts at Lagos based investment bank, Comercio Partners said: “As a result of the robust liquidity infusion stemming from FAAC inflows, interbank interest rates experienced a week-on-week decline, with the Open Buy Back rate (OBB) and the Overnight rate (O/N) converging at 1.00% and 1.70%, respectively. This liquidity surge in the interbank market catalyzed the downward movement, marking a reduction of 170 bps on average. We expect rates to hover at these current levels.”