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The Central Bank of Nigeria has been attracting much kudos of late especially for its handling of the exchange rate crisis.

Since it introduced a flurry of foreign exchange windows earlier in the year, the exchange rate between the naira and the dollar has remained fairly stable leading to a huge influx of foreign exchange from foreign investors.

By last official count, Nigeria has been able to attract about $2 billion in the first 5 months of 2017 compared to $1.1 billion in the corresponding period in 2016. This has impacted positively on the economy, at least for now, with the stock market gaining over 40% in the first half of the year alone.

While the introduced investor/exporter window is mainly attributed to the return of foreign investors, there is also a major monetary policy tool that the CBN has been using to ensure there is no exchange rate volatility, especially as it is critical to retaining investor confidence. The Open Market Operations, OMO.

 

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As the chart above highlights, the Central Bank of Nigeria has more than doubled its OMO sales since early this year, especially when it opened the investor window. OMO is a monetary policy instrument that the CBN uses to control the supply of money. When it believes that there is too much money in circulation, it sells OMO bills at attractive interest rates, giving banks an incentive to keep their money with the CBN rather than inject it into the economy.

So, to deter pressure on the dollar, the CBN sucks out naira from the economy by offering high interest rates believing that the more naira you have available to chase dollars, the lower the depreciation of the naira.

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The implication is that CBN’s OMO sales have ballooned to N7 trillion compared to N2.5 trillion a year earlier. The CBN has thus borrowed a net amount of N1.5 trillion this year alone and N4.8 trillion since 2016, adding to the growing concern that Nigeria may just be facing a debt crisis that it is not yet addressing.

Data from the CBN also shows OMO sales have attracted rates of between 17.5% and 18.5% with true yields often hitting as high as 22% per annum. This free lunch is the price Nigerians have to pay for keeping the exchange rate stable.

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