Understanding the New OMO Market in Nigeria

First, let’s start with two tough facts. Rising prices in Nigeria are at the center of the debate about how the Tinubu government's reforms have made life harder for the average Nigerian. The naira has lost its value against the US dollar, which is a big part of the problem. Now, the main issue. These facts show the big gap between the returns on naira-based assets and the consumer price index. Seven years ago, the Central Bank of Nigeria (CBN) tried to fix this by limiting local investors' access to its Open Market Operations (OMO). It didn’t work. The pressure on the naira only eased when a version of the market was allowed to replace the many ways the central bank traded foreign exchange. Interest rates stayed high, and lending to important sectors of the economy was almost non-existent.

Still, the CBN's decision in mid-August to lift the OMO restriction raises more questions than it answers. At its first auction under this new plan, the bid rates for the CBN's N450 billion allotment ranged from 19.90 percent to 20.46 percent, with a stop rate of 20.39 percent.

Now, let’s look at the answers. With the new channel for monetary policy, the OMO market now lets regular Nigerian savers respond directly to the CBN’s monetary policy. In this setup, when monetary policy is tight, OMO yields will rise, giving strong reasons for savers to put their money into OMO. This means banks will face higher funding costs as deposits become pricier. As a result, lending rates will likely go up. It’s a typical move by central banks to take away the easy money just when the economy is starting to pick up.

Until now, banks have given savings deposits a minimum rate of 30 percent of the monetary policy rate (MPR) set by the CBN's “Guide to Charges.” With the MPR at 26.50 percent, this means savings interest has been about 7.95 percent. With the OMO stop rate and the rate on the 91-day treasury bill in play, the reopening of OMO creates a new market benchmark. It shifts the focus from whether Nigerian banks are giving enough on savings accounts to how much they are willing to share of their earnings from risk-free CBN securities with their depositors.

The first question is important in a way. There are effects from the fact that millions of Nigerians do not have the knowledge, access, or minimum capital to join the securities market. These people are being hurt by rising prices. The rich can keep their money safe in T-bills and other money market options. Regular savers cannot do this. This creates a contradiction that the people the monetary policy aims to help may not feel the market rates at all.

The second question is even more crucial. If OMO yields stay high and banks continue to pay only 8% on savings while offering slightly better rates on term deposits, it suggests that the banking system has a lot of power over deposits. If banks start to raise deposit rates aggressively, then the reopening of OMO will show that competition was held back by not having an easy option for regular savers.

In the end, the biggest effect of this new policy might not be about how it encourages people and companies to move their money from regular bank deposits to Treasury bills and other interest-earning investments. It also might not be about how it limits private sector credit and investment by raising bank funding costs.

What matters more is that the government, by raising funds more easily through security market issuances, may end up taking savings that could have supported private investment. This is often called the “crowding out” effect that government borrowing has on the private sector. There are several points to consider. First, the private sector, working in competitive markets, usually manages funds better than the public sector, except for public goods. Then, we have to think about the negative impact of government debt on the economy, particularly how it can weaken the value of the naira.