By Milcah Tanimu
In a concerted effort to counter the economic challenges posed by soaring prices and inflation, the Central Bank of Nigeria (CBN) has drastically reduced its cash mop-up operations by 82%, from N830 billion in the corresponding period in 2022 to N150 billion in the nine months ending on September 30th, 2023.
This substantial reduction in cash mopping has resulted in a 46% surge in the average opening balance of idle cash in the banking sector during this period.
As part of its monetary supply management function, the CBN periodically mops up or injects cash into the banking system through Open Market Operations (OMO) and Treasury Bills (TBs). The CBN employs the sale or repayment of OMO TBs to reduce the money supply in the economy, thereby curbing inflation. Conversely, when the CBN aims to stimulate economic growth, it repays maturing OMO TBs to banks and investors with interest.
However, it remains uncertain whether this substantial reduction in cash mop-up measures has effectively boosted economic growth over the past nine months, as inflation rates continue to rise, and the gross domestic product (GDP) shows sluggish growth.
According to data from the CBN on OMO TBs transactions, the central bank sold N150 billion worth of OMO TBs in the first nine months of 2023, a notable decline from the N830 billion sold in the same period in 2022. Additionally, the amount of matured OMO TBs repaid by the CBN plunged by 82%, dropping to N313.52 billion in 9M’23 from N1.741 trillion in 9M’22.
Nonetheless, due to the sharp reduction in cash mopping by the CBN, the banking industry has experienced a 46% increase in the average daily cash balance, which surged to N407.13 billion in 9M’23 from N214.87 billion in 9M’22.
In a related development, the average daily cash balance climbed by 31% during the previous week, fueled by a N1.1 trillion inflow allocated by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government. In response, interest rates in the interbank money market dropped by an average of 170 basis points compared to the previous week.
Interest rates on overnight lending fell to 1.7% at the end of the week from 3.4% the previous week. Similarly, interest rates on collateralized borrowing (Open Buy Back, OBB) declined to 2.7% during the week, compared to 2.7% in the prior week.
With the CBN set to inject N10 billion via matured OMO TBs, analysts project that there will be further boosts in idle cash within the system, potentially keeping interbank interest rates at low levels.
In their financial market review, analysts at Lagos-based investment bank Comercio Partners stated, “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.”
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