FSDH Merchant Bank Limited stated that as a result of maturing government securities and distributions from Federal Accounts and Allocations Committee, the Nigerian financial system may experience increased flow of money in circulation to the tune of 2.33 trillion naira this month.
According to the Merchant Bank, out of the expected amount, an estimated total outflow of approximately 644 billion naira from the various sources, will lead to a net inflow of about 1.68 trillion naira in February.
To contain inflation, the development will necessitate the continued issuance of Open Market Operations at higher rates by the Central Bank of Nigeria (CBN) and other debt management authorities to mop-up the liquidity in the system.
The Nigerian general elections, which will kick off in the next few days, is a period characterised by high-level monetisation of voters’ interest by politicians, which creates additional money supply in the system. As a result of this, the Central Bank of Nigeria will have much to contend with this month, as inflation has remained on the upward trend, while it has resisted attempts on rate hike.
Ayodele Akinwunmi, the Head of Research at FSDH Merchant Bank, who presented the February Economic and Market Outlook in Lagos, said CBN continued its tight monetary policy stance throughout January 2019 through regular mop up of excess liquidity, in line with the bank’s expectations.
He noted that the goal of the policies which was designed to curb inflation and maintain stability in the foreign exchange market, “led to an increase in the yields on Nigerian Treasury Bills (NTBs) in January 2019” compared to the yield from NTBs in December 2018.
According to Akinwunmi, “we believe the yields on the NTBs may increase further, particularly on the long end from the current levels. NTB yields are likely to be influenced largely by the level of liquidity in the banking system, the short-term borrowing needs of the government, the need to maintain price stability and election considerations”.
He added that “traders in the Treasury Bill market may adopt a strategy that will allow them to shift from one tenor to another in order to take advantage of movements in yields”.