The Monetary Policy Committee (MPC) yesterday raised the cash reserve ratio (CRR) on public sector deposits held by banks to 75 percent, thereby reducing free funds from ministries, parastatals and other government agencies in their vaults. The move is also to strengthen the weakening naira and reaffirm the CBN’s commitment to price and exchange rate stability.
Sanusi Lamido Sanusi, Central Bank of Nigeria (CBN) governor, said yesterday that the regulatory bank would not devalue the naira, while urging government to block all the leakages in the system.
The committee however retained the monetary policy rate, the anchor rate at which it lends to banks, at 12 percent. The private sector CRR also remained unchanged at 12 percent, and liquidity ratio was also retained at 30 percent.
Some analysts said yesterday that the action may be based on delay by the Federal Government to establish the Single Treasury Account (TSA) that would checkmate leakages, the recent redemption of N1 trillion worth of bonds by the Asset Management Corporation of Nigeria (AMCON), and political spending with the attendant high liquidity.
They however warned that should the FX rate come under further pressure through other possible threats such as QE tapering, concern over change of headship at CBN and controversy over oil receipts, the CBN might be forced to raise it to 100 percent.
The action, it was gathered, would see the sterilisation of between N600 billion to N800 billion by the CBN, from the system, a development which analysts say would compel banks to embark on real intermediation with the accompanying rise in interest rate paid on deposits by customers.
It will also lead to marginal decline in banks’ earnings, as a result of the hike and also anticipation of an average increase in the cost of funds as competition among banks for funds intensifies, beginning from this quarter.
“The key culprit of this hike continues to be the DMBs. The ferocity of this policy on the banks is better understood, considering the total deposits in the system (N7.1 trillion) and total government deposit with DMBs (N3.5 trillion), i.e., 50.1 percent of the total deposit. The hike in CRR will effectively quarantine an additional N875.0 billion from the banking system,” according to Afrinvest analysts.
“We at Afrinvest Research further attribute the hike in CRR to the Federal Government’s delay in the implementation of the Single Treasury Account (STA) as suggested by the CBN in the last MPC meeting in November 2013. This policy will further dampen the Q1:2014 performance. We also anticipate an average increase in the cost of funds as competition for funds intensifies in Q1:2014. In addition, as observed in July, we expect the banks to increase lending rate to cover up for the potential loss in income from the new CBN policy,” they add.
For Johnson Chukwu, chief executive, Cowry Asset Management Limited, “The increase in cash reserve ratio (CRR) will lead to marginal but temporary increase in interest rates, particularly interbank rates. The impact on deposit and lending rates may, however, not be pronounced given that most banks had made provisions for possible increase in CRR for public sector deposits and are not likely to be caught napping as was the case when the CRR was increased from 12 percent to 50 percent.”
2014 would be quite a difficult year for the CBN in monetary management, noted Sanusi, who also identified four key concerns for the apex bank in the short-to-medium term as it navigates through the year in the face of difficulties on the global scene. Those concerns, according to him, include depletion of fiscal buffers following the continuing decline in oil revenue, rundown of reserves and depletion of excess crude oil savings; falling portfolio and FDI inflows; widening gap between the official and the BDC exchange rates; and creeping increase in core inflation.
The governor attributed the underlining pressure on core inflation to the widening spread between official and BDC exchange rates, adding that the inter-bank selling rate opened at N156.25/US$ and closed at N159.90/US$, representing a depreciation of N3.65k or 2.34 percent for the period. However, at the BDC segment of the foreign exchange market, the selling rate opened at N159.50/US$ and closed at N172.00/US$, representing a depreciation of N12.50k or 7.84 percent.
He added that what needed to be done at the moment was to make sure that “we do not use a disruptive force as we try to fight money laundering, and at the same time we do not allow the market to get to a level where there is no control over the use of foreign currency”.
“Ultimately, in the next few days you will see administrative measures aimed at reversing some of the supply-demand discrepancies that have come as a result of our own administrative actions while strengthening the surveillance and other market-friendly approaches to checking money laundering,” the CBN governor said.
Razia Khan, analyst at Standard Chartered Bank, London, said: “In view of increased market liquidity following the AMCON bond maturity in December, as well as an increased spread between the interbank FX rate and BDC rates, the move is not surprising. It is a clear demonstration of the CBN’s continued commitment to FX stability, even in a more difficult environment.”
Samir Gadio, emerging markets strategist at Standard Bank, London, is of the view that the decision to raise the CRR on public sector funds also has a pre-emptive character in addressing a likely fiscal slippage later this year. “Moreover, it allows the CBN to gradually achieve the liquidity management benefits of the proposed – but never fully implemented – single treasury account reform through the backdoor,” he adds.
“The hike should effectively mop up 80.0 percent of current market liquidity and reduce the propensity to speculate in the foreign exchange market. Further tightening may, however, be required in the medium-to-long term (6-12 months), due to a plausible combination of an increase in 2014 FAAC allocations with expected sizeable liquidity inflows via maturing fixed income instruments,” says Usoro Essien of Associated Discount House.
By: John Omachonu & Onyinye Nwachukwu
