Nigeria will struggle to make debt market policy work

Subject

Nigerian debt market.

Significance

A key Central Bank of Nigeria (CBN) strategy, focused on mopping up liquidity and attracting foreign exchange by selling high yielding, short-term securities, is at a turning point. While the policy succeeded for the most part, it came at a very high cost, with the ensuing high interest rate environment proving detrimental to the economy. With non-bank corporates and individuals restricted from purchasing CBN Bills, the securities market has essentially been split into two, with higher rates on CBN Bills and lower rates on Nigerian Treasury Bills.

Impacts

• The divergence in rates between CBN Bills and Nigerian Treasury Bills will likely continue in the short term until restrictions are removed.
• Liquidity might flow to safe assets (such as the dollar), which could put the CBN’s fixed exchange rate policy objective at risk.
• A recent uptick in growth risks being undermined by global trade uncertainty surrounding the Wuhan Coronavirus and lowering demand for oil.