Godwin Emefiele, CBN governor

BY EMEKA EJERE

The Central bank of Nigeria (CBN) last week continued its war against excess liquidity in the interbank money market, hitting the banking system with N600 billion Cash Reserve Ratio (CRR) debit.
It was learnt that excess liquidity in the banking system, which persisted throughout last year, rose further to N1.1 trillion at the close of business on Thursday (January 7) from N996.9 billion the previous week.
The increase, findings further revealed, was due to an inflow of N438.7 billion from matured secondary market (Open Market Operations, OMO) treasury bills during the week.
Reflecting the impact of the liquidity upsurge, the secondary market (OMO) treasury bills auction conducted by the CBN on Thursday recorded oversubscription of 1,031 percent as investors (banks) demanded for N678.6 billion worth of bills while the apex bank offered and sold N60 billion.
Worried by the likely impact of the huge excess liquidity the CBN on Friday (January 8) implemented two Cash Reserve Ratio (CRR) debits of N600 billion in two tranches of N400 billion and N200 billion, prompting the cost of funds to rise by 800 percent at the close of business on Friday.
Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending rose by 7.5 percentage points to 8.0 percent on Friday from 0.5 percent the previous week. Similarly, interest rate on Overnight lending, rose by 8.5 percentage points to 9.33 percent on Friday from 0.88 percent the previous week.
Since April last year, commercial banks in Nigeria have been under the heavy radar of the CBN over compliance to the 27.5 per cent CRR target. In August for instance, the apex bank withdrew a total of N118 billion from the accounts of about 20 banks over alleged default. Before then, it had debited the banks to the tune of N2.144 trillion between April and June.
The policy makers of the apex bank had in January last year tweaked the monetary policy instrument (CRR) for the first time in about four years by 500 basis points, to 27.5 per cent from 25.5 per cent.
The CRR is a mandatory part of bank’s total deposit, expressed in percentage, which a bank must maintain with the apex bank at all times and subject to change at the discretion of the regulator. By the decision, banks are now left with low level of funds to the tune of the new CRR, as the amount available for disbursement in the form of loans.
The CBN Governor, Godwin Emefiele, had admitted that the move was part of efforts to curb excess liquidity in the banking system, already adjudged as a contributor to the resurging inflation trend and pressure on the naira, which has been devalued thrice since last year from N306 to N410 to the dollar in a bid to unify the market rates.
But inflation seems to have defied all efforts so far. Data release by the National Bureau of Statistics (NBS) on Wednesday showed that inflation rate in Nigeria jumped in December to its highest level in more than three years.
Inflation stood at 15.75 per cent in December, compared with 14.89 per cent in November, marking the 16th straight month of increase. The consumer inflation rate in December was the highest since November 2017, when it stood at 15.90 per cent.
According to the NBS the composite food index rose by 19.56 per cent in December from 18.30 percent in November.
“This rise in the food index was caused by increases in prices of bread and cereals, potatoes, yam, and other tubers, meat, fruits, vegetable, fish and oils, and fats,” it added.
Analysts at the Financial Derivatives Company Limited, led by foremost economist, Mr. Bismarck Rewane, had earlier predicted that headline inflation would increase by 0.51 per cent to 15.4 per cent in December, describing it as “a hydra-headed monster that has eroded the disposable and discretionary income of consumers”.
“The continued rise in the general price level is driven largely by forex rationing, output and productivity constraints, higher logistics and distribution costs,” the analysts said.
Findings also revealed that the nation’s border policy, which led to the shutting of the land borders for about a year and half in fight against smuggling, strengthened the inflationary pressure through supply shortages.
Since June 2019, the apex bank has been pursuing aggressive policy of credit expansion, with focus on small businesses by setting a minimum LDR for banks from 60 per cent to 65 per cent presently.
“In furtherance of its primary mandate to maintain price and monetary stability and in view of the anticipated medium-term liquidity surfeit from maturing open market operations (OMO) bills held by local private and institutional investors, which would not be rolled over, the Committee considered it prudent to raise the CRR to curtail liquidity surfeit in the banking system”, the communiqué at the end of the January (2020) MPC meeting had read in part.
Emefiele, while unveiling the apex bank’s position for 2020 earlier at the Bankers’ Dinner, organized by the Chartered Institute of Bankers of Nigeria, in Lagos, disclosed that CBN would maintain a cautious approach and defend the naira to avoid reversal of gains.
But analysts are of the view that with the outbreak of the economically devastating Covid-19 pandemic which was not envisaged before the policy review, the CBN would have exercised some restraint in its enforcement. They argue that since the pandemic has thrown the Nigerian economy into a state of chaos, one of the things needed the most to ensure a quicker recovery is high liquidity in the system.
“Unfortunately, CBN’s move did exactly the opposite of this. How then does the apex bank expect the economy to recover?, an economic commentator, Kalu Aja, queried.
He said, “It’s just optics. If you are in a crisis where liquidity is tight because of limited commerce, why take away liquidity from the market? All over the world, central banks are injecting liquidity. This is definitely not a good move at this point.
“However, Governor Emefiele is worried about inflation which is his core responsibility. There is also the real fear that naira will start buying dollar and push up exchange rates. So, he is starving the foreign exchange market of cash.”
But an ex banker and lead partner, Patrick Modilim & Co, believes most banks are not bothered about CBN sanctions over CRR and LDR as they think it is safer to have their funds with the apex bank than lend them out with high risk of default.
Modilim in a telephone interview with Business Hallmark said, “Even most of the banks are not lending. So, if you are not lending, how do you record bad loans in your loan books?
“Many banks believe it is better and safer to be sanctioned by CBN than give out loans that they are not sure of recovering.”