Nigeria's Central Bank to Withdraw N4.69 Trillion as Liquidity Surges

The Central Bank of Nigeria (CBN) is preparing to withdraw N4.69 trillion from the financial system, following a sharp increase in banking system liquidity. This significant move precedes the settlement of the CBN's latest Open Market Operation (OMO) bills, which were offered on Tuesday. Liquidity in Nigeria's banking system recently climbed sharply to N8.84 trillion, raising expectations of a substantial cash withdrawal.

The CBN employs OMO bills as a key instrument to absorb surplus cash and manage liquidity within the financial system. In its recent offering, the apex bank initially presented N2.5 trillion in OMO bills across three distinct maturities. Strong investor demand for these government securities reportedly led to the eventual amount raised reaching approximately N5 trillion.

The current banking system liquidity of N8.84 trillion represents a 37.01 percent increase from N6.45 trillion, according to AIICO Capital Limited. This surge has pushed excess liquidity to more than double the N3.82 trillion recorded at the beginning of the year, reflecting the combined impact of OMO maturities and other inflows. Despite this, overnight borrowing costs recorded a modest increase, with the overnight lending rate rising by 28 basis points to 20.86 percent.

The impending N4.69 trillion withdrawal is a sizeable reduction from the current N8.84 trillion liquidity pool and could significantly alter short-term money-market rates. This liquidity position is a crucial market indicator for banks managing cash amidst the CBN’s continuous use of OMOs to regulate the financial system. The heavy demand for OMO instruments also highlights continued investor appetite for high-yielding naira assets, particularly as monetary policy adjusts.

The settlement of the latest OMO transaction is expected to significantly reduce the amount of cash available to banks, thereby reversing part of the recent liquidity buildup. Market participants are closely monitoring the impact of this substantial withdrawal on short-term funding rates. The Nigerian Overnight Financing Rate, however, stayed at 20 percent, representing the lower boundary of the current interest-rate corridor following the CBN’s recent monetary policy easing.