Treasury bill liquidity becomes test of Nigeria's banking reforms

Nigeria’s Treasury bill market is emerging as an unexpected test of the country’s banking reforms, with a senior government adviser warning that the ability of investors to exit naira paper without incurring losses will shape confidence in the broader financial system.

Taiwo Oyedele, chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, raised the issue at the IMF-World Bank Annual Meetings in Bangkok, according to accounts published on October 22. He said the authorities were working to improve liquidity and price discovery in the Treasury bill market so that investors could exit naira-denominated securities without additional risk.

The comment points to a problem that is easy to overlook when yields are high. Nigeria’s government debt market offers attractive nominal returns, but it is not always easy to sell. Bid-ask spreads can be wide, trading is concentrated in a few maturities and large orders can move prices. For domestic banks, that is a liquidity-management inconvenience. For foreign investors, it is a risk that can deter entry.

Why liquidity matters for the reform agenda

The federal government has relied heavily on domestic borrowing to finance its deficit. Treasury bills and FGN bonds are the main instruments, and banks, pension funds and asset managers are the main buyers. If those investors cannot sell when they need cash, they demand a higher yield to compensate for the risk.

That raises the government’s borrowing cost and makes it harder for the central bank to manage liquidity. It also weakens the transmission of monetary policy. When the policy rate changes, the effect should pass through to short-term yields and then to lending rates. If the secondary market is illiquid, that transmission is slower and less predictable.

Oyedele’s remarks suggest that the government now sees market microstructure as part of the reform agenda, not just an operational detail. Improving liquidity requires more than issuing more bonds. It requires primary dealers, repo markets, benchmark sizes, transparent price reporting and a predictable auction calendar.

The demand picture is already shifting

The Treasury bill market has shown signs of strain. At the October 7 auction, the DMO offered N900 billion across 91-day, 182-day and 364-day bills but received only N1.77 trillion in subscriptions, down from N4.23 trillion at the September 23 auction. Demand was concentrated in the one-year bill, which offered the highest yield.

The decline in subscriptions is not necessarily a sign of weak demand. It may reflect tighter liquidity, higher yields on OMO bills and a deliberate decision by banks to hold cash. The CBN’s heavy OMO sales in September withdrew N6.62 trillion net from the banking system, reducing the funds available for Treasury bill purchases.

The one-year bill stop rate was 15.90 per cent at the October 14 auction, while the 91-day and 182-day rates were lower. The shape of the curve suggests that investors expect inflation to fall and policy rates to ease, but they are demanding compensation for holding longer-dated paper.

The tax uncertainty

Oyedele also addressed tax uncertainty around Treasury bills, OMO bills and bonds. Investors have questioned whether interest income from these instruments will remain exempt from certain taxes. He said he could not guarantee an exemption but promised clarity, arguing that uncertainty itself was costly for the market.

Tax treatment matters because it affects after-tax returns. If investors are unsure whether interest income will be taxed, they may demand a higher gross yield or avoid the instrument altogether. That raises the government’s borrowing cost and reduces liquidity.

The issue is particularly sensitive for foreign investors, who compare Nigerian yields with those in other emerging markets on an after-tax basis. A clear, stable tax regime would make Nigeria more competitive. A confusing or changing regime would undermine the reform narrative.

The central bank’s role

The CBN cut the monetary policy rate by 350 basis points to 23 per cent in September, its first reduction in more than a year. The move was intended to signal a shift toward easing as inflation slowed to 14.63 per cent. But the cash reserve requirement remains at 45 per cent, and OMO sales have kept liquidity tight.

That mix has created an unusual market. Short-term yields are high, the curve is steep and investors are uncertain about the pace of easing. Banks can earn attractive returns by holding OMO bills, which are issued by the central bank, rather than Treasury bills, which are issued by the DMO. The competition between the two instruments affects liquidity in both markets.

Oyedele said the authorities were working together to address the problem. That cooperation is essential. The DMO controls issuance, the CBN controls liquidity and the Ministry of Finance controls tax policy. If they act at cross purposes, the market will remain fragmented.

What would make a difference

A more liquid Treasury bill market would have several features: regular issuance in benchmark sizes, a stable auction calendar, active primary dealers, a functioning repo market and transparent post-trade reporting. Nigeria has some of these elements, but not all of them at the scale needed for large institutional investors.

The government could also improve liquidity by consolidating smaller bond lines into larger benchmarks. Fragmented issuance creates many small securities that are difficult to trade. A smaller number of larger, more liquid lines would be easier for investors to buy and sell.

The CBN could support liquidity by providing clearer guidance on its OMO operations and by allowing banks to use government securities as collateral in a wider range of facilities. A deeper repo market would give investors a way to raise cash without selling their bonds, reducing the need for fire sales.

The stakes

Nigeria’s ability to finance its deficit at a reasonable cost depends on a functioning government debt market. If investors demand a liquidity premium, the government pays more. If foreign investors stay away, the burden falls on domestic banks and pension funds, crowding out private credit.

The Treasury bill market is therefore not a technical sideshow. It is a test of whether Nigeria’s reforms can create the institutions and infrastructure that investors need. Oyedele’s comments are a recognition of that reality. The next step is to turn the diagnosis into specific, measurable changes.

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