At the Central Bank of Nigeria’s last Monetary Policy Committee meeting of Tuesday, November 24, 2015, the apex bank reduced its Monetary Policy Rate (MPR) moving it down from 13 percent to 11 percent. It also moved the Cash Reserve Ratio (CRR) from 25 percent to 20 percent.
The MPR is the key rate which drives interest rate in the country. It is the rate at which the CBN lends money to commercial banks. The CRR is the banks’ depositors cash reserve requirement held by the apex bank.
The MPC, in summary, according to Mr. Godwin Emefiele, the CBN governor, voted to reduce the CRR from 25.0 percent to 20.0 percent; reduce the MPR from 13.0 percent to 11.0 percent and change the symmetric corridor of 200 basis points around the MPR to an asymmetric corridor of +200 basis points and -700 basis points, around the MPR.”
Analysing the decision, Dr. Boniface Chizea, CEO/ BIC Consultancy Services, Lagos, said these decisions are salutary for the economy going forward and therefore should be applauded and commended.
According to him, what is even surprising is that the MPR had remained the same over an unduly long period of six years, noting that there is a consensus in the land that the economy should be reflated to begin to reduce the misery index in the land and the little wonder had been that monetary policy appeared tardy in moving in this desired direction.
Mr. Odilim Ewegbara, a development economist, also commended the action of the CBN, he, however, said it is coming too late in the day.
“No doubt next MPC meeting, we will expect MPR further decreased to about 9 percent after all there is no genuine reasons for Nigeria’s interest rates to be among the highest rates in the world”, he noted, attributing the development to the success of the TSA policy and asked the apex bank to further reduce the key interest rates to protect the country from the arbitrage enjoyed by portfolio foreign investors.
Mr. Henry Boyo, a renowned economist and Managing Director, Cocosheen Nigeria Limited, had blamed the CBN and its allies for creating the situation where the cost of funds in the country is in the excess of 20 percent.
Boyo had said it would be foolhardy to think the economy will grow and become competitive or meet the demands of the people when the cost of funds is over 20 percent.
“Central Bank of Nigeria and its allies are the ones creating the situation where the cost is in the excess of 20 percent. I will dare you to name a country that has developed successfully and has made a mark industrially and has generated increased employment for its people with cost of fund as high as 20 percent.
Best practice in most economies is that when you have the kind of situation that we have, which is huge rate of unemployment and almost comatose real sector, the cost of fund will be as low as 2-3 percent”.
Emefiele had said at the end of the meeting in Abuja that the action was in response to the need to activate the real sector of the economy by making sure that both the apex bank and the commercial banks play their fundamental roles to reinvigorate the real sector in the country’s diversification drive.
He also noted that the relief in the reduction of the CRR would, however, be enjoyed only by banks that key into the apex bank’s plan of boosting agriculture and the real sector aimed at creating employment and productivity.
“The MPC emphasised that the liquidity arising from the reduction in the CRR to 20 percent will only be released to the banks that are willing to channel it to employment generating activities in the economy such as agriculture, infrastructure and solid minerals”, he reckoned.
Chizea said the decisions taken by the MPC have a redeeming effect for its image.
“It is therefore expected that the cash infusion would positively impact the cash base of the banks and put them in good stead to undertake their role of financial intermediation at a considerably reduced cost of funds”, he noted.
He agreed with the CBN governor that “it should also contribute to the bottom line of the banks thereby improving their profitability outlook. If the banks use the additional funds which will result from this accommodation to lend to the real sectors of infrastructure, roads, manufacturing, agriculture then such a development would contribute substantially to the utilization of idle capacity, grow job opportunities, increase purchasing power and reduce unemployment in the land and directly ameliorate the prevalent misery index.”
Emefiele had reckoned that the import of these decisions is to forestall the surreptitious behaviours of banks, which take advantage of high interest rate margin to keep money at CBN, earning interests on idle cash, while ignoring real sector.
However, Dr. Boniface Chizea’s only feared downside is the stoking of inflationary pressure. But, he said, for the full effect of this promised result to come to pass the fiscal authorities must cooperate by adopting also supply side economics by taking deliberate steps that would make contributions in this desired direction of reflating the economy.
Meanwhile, the dividends of the MPR reduction for savings account holders may have started trickling down. A bank sent SMS to its customers informing them that following MPR reduction they will be earning interest rate of 3.3 percent per annum on their savings account.
BY DON OKERE