Financial Flashpoint: OMO Auction and Tariff Hike

Last Wednesday, in a bid to intensify efforts to regulate money supply, the Central Bank of Nigeria (CBN) conducted its first Open Market Operations (OMO) auction in April. At the end of the auction, a total of ₦676.65 billion worth of securities were taken.

Similar to most auctions in recent times, investor interest in the 363-day tenor was notably high, with subscriptions totalling over ₦1.15 trillion, surpassing the ₦350 billion worth of bills offered and securing a higher subscription than the last auction, which recorded a total of ₦1,092.25 billion.

The CBN maintained rates for all levels except for the 363-day tenor, which declined slightly from 21.50% to 21.1250%, illustrating the commitment to addressing inflation and stabilising the domestic currency. Total sales for the 363-day tenor reached ₦652.40 billion, which is lower when compared to ₦1,013.25 billion sold at the last auction. Out of the ₦150billion offered for both the 97 and 188-day bills, barely 23% and 10%, respectively, were sold on the securities.

In light of events, the CBN’s dynamic conduct of the OMO auctions demonstrates the bank’s commitment to managing liquidity in the economy. By selling bills at high interest rates, it is hoped that there will be an absorption of excess money supply, which is germane for tackling inflation and maintaining the exchange rate stability.

Moreover, the increase in interest rates signals the CBN’s dedication to making Nigerian securities appealing, particularly to foreign investors, thereby inviting capital inflows to reinforce the economy’s stability and sustenance.

In a new development, the Federal Government has hiked the electricity tariffs specifically targeted at its Band A customers — those privileged with 20 hours of daily electricity supply.

During a press conference held in Abuja, the Vice Chairman of the Nigerian Electricity Regulatory Commission (NERC), Musliu Oseni, unveiled the details of this increase, stating that customers falling under Band A will now be charged ₦225 per kilowatt-hour, a substantial leap from the previous ₦66 rate. NERC also claimed that the increase in electricity tariffs would reduce grid collapses and enhance power supply.

Furthermore, he disclosed that the commission had taken the additional step of reclassifying certain customers from Band A to Band B due to their distribution companies’ failure to meet the mandated hours of electricity provision. Emphatically, he added that the Band A customers constituted 15% of the country’s 12 million electricity consumers.

Considering this development from the lens of the financial markets, where the Government implements the increase in electricity tariffs, it could lead to higher revenue generation. This might positively impact investor confidence in Government securities, such as treasury bills and bonds, as it could better demonstrate the Government’s ability to meet its debt obligations. In contrast, where the increased tariffs lead to significant inflationary pressures or economic disruptions, it could raise concerns about the Government’s ability to manage its fiscal policies effectively.