Experts have given the thumbs up to the Central Bank of Nigeria (CBN) over its downward review of the Cash Reserve Ratio (CRR) to 31 per cent. This is coming after persistent outcry from banks that the previous CRR regime had adversely impacted their margins. According to the pundits, this action of the CBN would help spur economic growth when the improved liquidity position of the banks is channeled into productive use.
Rising from its Monetary Policy Committee (MPC) meeting held in Abuja yesterday, the CBN harmonized the CRR to 31 per cent, up from 20 per cent for private sector deposits and 75 percent for the public sector.
The Managing Director, BIC Consultancy Services, Dr Boniface Chizea in a telephone reaction with Hallmark said the CBN has taken the right step in readjusting the CRR, because a lot of banks had been complaining bitterly about the regulator’s decision to put the CRR at the former rates.
He said, “The CBN saw the need to relax the CRR and monitor how it will come out.” Dr. Chizea allayed the fear that this CBN’s decision may further trigger higher inflation, saying the liquidity being released would not go directly into the system, but to the banks where it belongs.
He argued that if the money is ploughed into production, it will stimulate growth that would cushion the inflation that may arise. For Dr. Uju Onyekwere, former Registrar of CIBN, this move by the apex bank is to make more liquidity available to banks to be able to effectively carry out their businesses.
“It is going to help the economy as long as they are properly utilized. If such money is engaged in productive activities, it would create jobs and make the people have more purchasing power,” he stated.
The apex bank stated its resolve to safeguard the country’s foreign reserve, which has been nose-diving since the global oil crisis.
The Governor of the apex bank, Mr. Godwin Emefiele, who read the communiqué of the MPC meeting, said, “Committee stressed the need for proactive measures to protect the reserve buffer to safeguard the value of the domestic currency and engender overall stability of the banking system.”
The CBN retained the MPR at 13 per cent with a corridor of +/- 200 basis points around the midpoint and the Liquidity Ratio at 30 per cent.
Hallmark had reported in its Monday edition that the apex bank was likely to retain most of the benchmark rates, but stressed that the apex bank was coming under increasing pressures from banks and shareholders to reduce or pay interest of the cash reserve deposits.
Mr. Emefiele opined, “It was noted however, that monetary policy is gradually approaching the limits of tightening.” The CBN Governor noted that it was impossible for the apex bank to intervene on a daily basis to supply banks with foreign exchange and support the naira currency.
Enunciating the reason for the harmonization of the CRR, the CBN boss stated that the current discriminatory CRR on public and private sector deposits has not only constrained the policy space but could inspire moral hazard for private sector participants.
He added, “Consequently, it was recognized that while additional tightening measures may not be appropriate now to avoid overheating the economy, a harmonization of the CRR was imperative in order to curb abuses and improve the efficacy of monetary policy.”
The MPC reasoned that anaemic recovery in the Euro Area and Japan and tepid growth conditions in China constitute an additional drag on crude oil exports prospects, saying that the decline in trade balance, which commenced in the second half of 2014, could persist over a much longer period with further implications for public revenues and external reserves.
The committee also noted that the continued glut in crude oil supplies amidst softening prices anchored by sluggish global output expansion could further pose serious threat to the country’s foreign exchange earnings and accretion to external reserves over a much longer period.
Meanwhile, the MPC was worried by the country’s rising inflation since January 2015. It, however, said that the causal factors were largely transient and outside the purview of monetary policy. The committee identified the significant rising trend in credit to government as potential headwinds to growth with negative spill-overs to the already elevated lending rates.
The Committee expressed deep concern over the lacklustre performance of the external sector arising from a number of significant global shocks.
The MPC was of the opinion that the goodwill and confidence the country garnered as a result of the successful completion of the 2015 general elections would rub off positively its economy by stemming “the spate of capital reversal, reduce pressure in the foreign exchange market and stabilize the financial markets in the short to medium term.”
“With the successful completion of the general election and the progress recorded in the fight against insurgency, the committee noted there is expected to be a reversal in the economic slow down,” said Emefiele.