CBN Liquidity Test Exposes Structural Market Weakness

Nigeria’s monetary authorities are testing the limits of domestic liquidity absorption as the Central Bank of Nigeria (CBN) sold only ₦1.1 billion worth of Open Market Operation (OMO) bills despite offering a high yield to attract investors. The muted subscription highlights the structural disconnect between elevated nominal rates and real return expectations in an economy where inflation, currently at 28.6%, continues to erode bond appetite. The outcome signals that liquidity is tightening unevenly across Nigeria’s banking system, with risk aversion and duration fatigue undermining the central bank’s sterilization strategy.

OMO operations are a central instrument in the CBN’s toolkit to manage short-term liquidity and signal monetary intent. The undersubscription suggests that investors are pricing in persistent inflationary pressure, exchange-rate uncertainty, and potential fiscal crowding-out, all of which reduce the appeal of short-dated instruments. Nigerian Treasury Bill yields have risen sharply, with the 91-day paper trading near 17.8% and the one-year benchmark around 20.4%, while real yields remain negative by nearly 800 basis points. With the naira (NGN/USD 1,495) still under depreciation pressure, local funds are demanding a currency-risk premium that the central bank appears unwilling to meet. This creates a feedback loop: the CBN’s limited uptake constrains its ability to mop up liquidity, which in turn keeps inflationary expectations unanchored.

Mechanically, OMO absorption relies on the balance-sheet strength of commercial banks and the risk appetite of institutional investors. But Tier 1 banks are increasingly cautious amid rising non-performing loans, which climbed to 5.4% in September 2025 from 4.8% a year earlier. Their preference has shifted toward secured lending and corporate commercial paper issuance, where yields are similar but liquidity risk lower. The private market’s growing activity—illustrated by Jimcol Resources’ recent ₦2 billion commercial paper issuance—further drains potential demand from CBN sterilization instruments. This crowding-out of sovereign liquidity tools by corporate paper suggests a deepening private debt market but also a weakening of monetary transmission, as short-term policy signals lose traction in the interbank curve.

At the macro level, the CBN’s struggle to attract OMO bids mirrors a broader loss of confidence in the naira yield curve. The government’s domestic borrowing requirement remains high, with total debt projected to reach 47% of GDP by end-2025, up from 39% in 2023. Financing needs of ₦15 trillion, coupled with weak foreign portfolio inflows—down 35% year-on-year—have forced domestic investors to hold longer maturities, locking up liquidity that might otherwise chase short-term sterilization bills. The liquidity mismatch complicates the CBN’s disinflation goal and risks widening the spread between policy and market rates.

The policy tension is acute. Raising OMO yields high enough to restore investor demand would push up government borrowing costs and reinforce fiscal dominance; holding yields steady risks inflationary persistence and naira depreciation. The naira’s parallel-market rate remains 8–10% weaker than the official window despite improved oil receipts, showing that credibility, not volume, is the constraint. Nigeria’s oil output recovered to 1.46 million barrels per day in Q3 2025, still below the OPEC quota of 1.8 million, limiting FX supply. Consequently, investors are treating fixed-income instruments as currency hedges rather than yield plays, a dynamic that distorts capital allocation and penalizes productive credit.

Historically, similar OMO undersubscriptions in 2017 and 2020 preceded shifts in CBN liquidity policy—either via special bill issuance or temporary interventions in the FX window to stabilize the naira. The current episode could therefore foreshadow another recalibration, possibly through targeted CRR adjustments or incentive-linked liquidity windows to reinvigorate interbank activity. Market participants will monitor short-term interbank rates (NIBOR) and the slope of the Treasury curve: sustained spreads above 300 basis points over the Monetary Policy Rate (MPR = 24.75%) would signal tightening conditions inconsistent with growth objectives.

For global investors, the signal is twofold. First, Nigeria’s monetary policy transmission remains impaired despite high nominal yields, implying that inflation expectations are not yet anchored and real rates remain structurally negative. Second, the weak OMO uptake indicates local institutional preference for credit instruments that hedge against currency volatility, not for pure monetary sterilization assets. By Q2 2026, the effectiveness of Nigeria’s liquidity operations will be measurable in three variables: OMO uptake volumes consistently above ₦100 billion per auction, inflation below 20%, and a stabilized NGN/USD corridor under 1,400. Until then, high nominal yields will not compensate for credibility deficits, and liquidity management will remain the CBN’s most fragile policy lever.