Participation in Ethiopia’s open market operation (OMO), the central money market auction introduced by the National Bank of Ethiopia (NBE) in July, has steadily decreased, despite initial enthusiasm from financial institutions. While the ratio of participation grew initially, engagement has since slowed down, highlighting concerns over the effectiveness of the instrument in maintaining liquidity within the banking sector.
Financial institutions’ initial interest wanes
When the NBE first introduced the money market instrument as part of its macroeconomic reforms, several financial institutions eagerly participated. However, over time, participation rates have gradually declined. According to Fikadu Digafe, vice governor and chief economist at the NBE, fewer players are now involved in the auctions, and the total amount sold to the NBE has decreased significantly.
“The number of participants and the value is gradually decreasing, but banks that are liquid are still participating in the auction,” Digafe shared with Capital.
Fewer banks in recent auctions
The most recent auction, held on Thursday, September 5, saw participation from only five banks, with a total of 15.4 billion birr allotted. This marked the fifth auction since the introduction of the instrument.
In contrast, the second auction, which focused on absorbing market liquidity, saw 21 banks participating, raising a total of about 37.5 billion birr. The inaugural auction on July 11 involved 16 banks and raised about 20 billion birr with a 15-day maturity term.
However, participation has decreased since then, with only 12 and 9 banks involved in the third and fourth auctions, held on August 8 and 22, respectively. The sums raised in these sessions were 29.6 billion birr and 23.3 billion birr.
Average auction amounts increase despite fewer participants
Despite the declining number of participants, experts observed that the average amount allocated per bank in recent auctions has increased. In the latest auction, each of the five participating banks received an average of 3.1 billion birr—the highest average since the auction on August 21, where the share was 2.6 billion birr per bank.
Several bank executives, including leaders of newly established banks, participated in earlier auctions to test the new system. One executive noted, “We offered less than 100 million birr on the initial auction to test the new market.”
Shifting focus to foreign currency business
Experts suggest that the reduced participation in OMO auctions could be attributed to banks redirecting their liquidity towards investments in foreign currency. Since the NBE opened the foreign exchange market to market forces, banks may be more inclined to focus on currency trading.
“Their liquidity may be transferred to investments in foreign currency businesses,” one expert explained.
Fikadu Digafe confirmed that the NBE is encouraging banks to shift their resources towards hard currency mobilization as part of their broader financial strategy.
OMO’s role in inflation control and liquidity management
The OMO, with a two-week maturity term, is designed as a tool to manage liquidity in the banking system and control inflation. According to the NBE’s new monetary policy framework, introduced at the start of the 2024/25 fiscal year, biweekly auctions will either withdraw or inject liquidity based on market conditions.
The OMO serves as the primary tool to maintain interbank market rates near the national bank rate (NBR), which was set at 15 percent. When there is excess liquidity in the banking system, causing rates to fall below the NBR, the OMO will absorb liquidity. Conversely, when there is a shortage, the NBE will inject liquidity into the system.
New tools for liquidity management
In addition to the OMO, the NBE is also in the process of introducing an ‘overnight lending facility’ and an ‘overnight deposit facility’ to help banks manage liquidity over short-term periods. These facilities, formally known as standing facilities, will be available at the NBR rate plus or minus 3 percent.
