Nigeria’s banking system is set to receive N2.56 trillion in liquidity this week, down sharply from N5.40 trillion last week, as the Central Bank of Nigeria (CBN) maintains its tight grip on money supply despite improving macroeconomic conditions.
An analysis of the latest Financial Markets Dealers Association (FMDA) Weekly Market report shows the expected inflows represent a 52.5 percent week-on-week decline, underscoring the apex bank’s determination to keep excess cash out of the financial system as it battles inflation and supports exchange rate stability.
The moderation in liquidity follows a week in which the financial system absorbed multiple liquidity-draining activities, including Cash Reserve Ratio (CRR) debits by the CBN, a private Open Market Operations (OMO) auction, and the federal government’s bond auction, where the Debt Management Office (DMO) raised N929.32 billion from investors.
Although liquidity is expected to tighten further, market indicators suggest investors remain optimistic about Nigeria’s financial outlook, buoyed by record-high external reserves, declining sovereign bond yields, and sustained demand for government securities.
The FMDA report indicates that OMO maturities worth N2.186 trillion will account for approximately 85 percent of this week’s projected liquidity inflows, making them the largest source of cash entering the banking system. Other inflows are expected from federal government bond coupon payments of N282.26 billion, commercial paper maturities of N84.87 billion, and corporate bond coupon payments of N9.03 billion. There are no Treasury bill maturities, bond redemptions, or Federation Account Allocation Committee (FAAC) disbursements scheduled for the week.
The CBN, however, appears to be offsetting much of the incoming liquidity.
The apex bank is scheduled to conduct a N700 billion Treasury bill auction, comprising N100 billion in 91-day bills, N100 billion in 182-day bills, and N500 billion in 364-day bills, signalling that policymakers remain committed to sterilising excess liquidity and maintaining elevated interest rates.
The continued monetary tightening has already left its mark on the banking system.
According to the FMDA, system liquidity declined by 18.41 percent to N3.78 trillion from N4.63 trillion in the previous week as the combined impact of CRR debits, OMO sales, and the government bond auction reduced the amount of cash available within the financial system.
While liquidity has tightened, the sovereign debt market has continued to attract strong investor appetite.
“The DMO’s bond auction was heavily oversubscribed, attracting N1.74 trillion in subscriptions against N1.20 trillion offered. The agency eventually allotted N929.32 billion across three reopened instruments, with the 16.2499 percent FGN April 2037 bond emerging as the most sought-after security.”
The strong demand was reinforced by the DMO’s revised third-quarter borrowing calendar, which signalled lower bond supply for the remainder of the quarter.
Consequently, the report disclosed that the average FGN bond yields declined by 37 basis points to 17.16 percent, reflecting stronger buying interest in the secondary market as investors positioned ahead of potentially tighter bond supply.
Trading activity also accelerated sharply. FGN bond turnover jumped 149.5 percent to N1.98 trillion from N794.58 billion the previous week, driven largely by increased trading following the primary auction. Treasury bill turnover, however, fell 9.87 percent to N1.51 trillion, suggesting investors showed greater preference for longer-duration government securities.
Beyond the domestic fixed-income market, Nigeria’s external position continued to strengthen.
The country’s external reserves climbed to $52.03 billion, surpassing the $52 billion mark for the first time since January 2009, supported by sustained foreign exchange inflows. The stronger reserve position helped keep the official exchange rate relatively stable at N1,370.98 per dollar, while the parallel market traded around N1,412.60 per dollar.
However, global developments continue to pose upside risks to inflation and monetary policy.
Average Brent crude prices rose 10.92 percent to $94.35 per barrel during the week as renewed geopolitical tensions in the Middle East disrupted supply expectations. The FMDA also highlighted broader global concerns, including JPMorgan’s warning that a potential “super” El Niño combined with higher oil prices could reignite inflation, while supply disruptions linked to conflicts involving Iran and Ukraine continue to push physical crude prices toward $110 per barrel.
For investors, the current environment presents a delicate balancing act.
On one side, the CBN’s persistent liquidity tightening is expected to keep short-term interest rates elevated and reinforce its anti-inflation stance. On the other hand, stronger external reserves, falling bond yields, and sustained demand for sovereign debt suggest that confidence in Nigeria’s macroeconomic outlook is gradually strengthening.
Chinwe Michael is a financial inclusion advocate and economic journalist who uses compelling storytelling to drive awareness.
