The preponderance of excess liquidity in the banking sector, side by side its shortage in the economy has become a matter of concern to the Central Bank of Nigeria (CBN) as well as to analysts.
The development is said to be undermining some policy measures by the CBN, particularly the weekly open market operations (OMO) mechanism to either withdraw the perceived excess liquidity in the system, or reflate the economy through purchase of Treasury Bill instruments.
Analysts wonder why banks are averse to giving credit and lending rate is at a high of 25 percent, with inflation trending down, if the economy is awash with liquidity. For instance, as at last week Thursday, the banking sector was sitting atop N562.2bn idle cash, which is not being lent to the economy, with the attendant pressure in the foreign exchange market.
Godwin Emefiele, CBN governor, at the last Monetary Policy Meeting, said the situation has made “money market rates to be virtually below the policy rate for a considerable part of fiscal 2014, suggesting persistence of liquidity surfeit, with the attendant possibility of pressure in the foreign exchange market, or the alternative burden of mopping up.
Giving a graphic picture of the ugly development, Emefiele said, “Credit to the private sector grew by a mere 5.36 per cent at end -August 2014, translating to anannualised rate of 8.04 per cent, compared with our annual target of 15.85 per cent. Aggregate money supply grew by 2.94 per cent during the same period, annualising to 4.41 per cent against the annual target of 15.52 per cent.
“This analysis suggests that the liquidity surfeit only exists in the banking system, while the economy as a whole is short of liquidity. The challenge for monetary policy, therefore, is to devise innovative means to channel the excess liquidity within the banking system to the economy, rather than sucking them up. In the interim however, I would advocate for moral suasion on the banks to deploy their excess liquidity into the real sector, instead of gilt-edged government securities and related investments.”
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Bismarck Rewane, chief executive of Financial Derivatives Company, in the current bi-monthly Economic Bulletin said, “There was increased liquidity in the money markets in the first half of October, as evidenced in the average opening position of N489.63bn, which was 34.33% higher than the corresponding period in September of N364.49bn. OMO repayments increased by over 120%, according to the CBN‘s financial data to N441.76bn.
Broad money supply (M2) grew by 2.72% on a month-on-month basis to N16.57trn in September. This is the highest level of M2 year to date. According to the CBN, monetary aggregates all recorded increases in value. Nigeria‘s inflation for the month slowed; an indication that the increase in M2 had a negligible impact on the consumer price index in September.” –
Razia Khan, managing director, head – Africa Macro Global Research, said that the situation is creating avenues for manufacturers to pass high cost of production to consumers by way of higher prices.
“Our Standard Chartered- Premise Consumer Price Tracker which tracks prices in real time has not yet picked up on any price pressures. Nonetheless, our latest Nigeria Business Sentiment survey has firms reporting that they are able to pass price increases on, in response to higher input prices.
“ The first supports the assertion that the excess liquidity is mainly in the banking system. But firms’ actual experience with pricing appears to suggest that the CBN should remain vigilant over emerging inflation risks, especially with the NGN FX rate pressured. Nigerian firms are operating in an environment where they are still able to pass higher prices on. Firms are reacting rapidly to the weaker NGN – and passing higher costs on. The threat of inflation has not diminished”, Khan said.
She said that the latest October survey also revealed that “the interest rates paid indicator fell to its lowest level since June (49.2). However, credit availability – which had been assessed to be rising for two months – slipped into contractionary territory in October (46.8) from a three-month high in September (56.8).”
She added that the policy would not automatically encourage banks to banks want to take on the risk of more real sector lending. Lending to SMEs is especially difficult – and risky. Unless banks know they will be compensated for the risks that they take, it is not something that they will do very easily.
The broader legal environment is also a factor in banks’ willingness to lend.Can they recover collateral if needed? How quickly?
However, Ayodeji Ebo, analyst with Afrinvest, said that despite the huge funds in the banking industry, the new policy on Standing Deposit Facility will reduce the amount of funds placed at the discount window to below N200bn relative to N562.2bn as at last week Thursday.
“Invariably, approximately N4.5bn or N36.2bn interest income for Deposit Money Banks (DMBs) will be lost for the two months in 2014 and FY:2015 respectively, with impact varying among the banks.
“In our view, this may not necessarily translate to a significant increase in lending by banks to the real sector in the near term, as the risk that pervade this space remain evident.
“The Federal Government needs to de-risk the real sector by providing robust infrastructure that reduces overheads and enhance profitability. This will moderate the delinquency rate, as the firms (debtor) will be able to generate a return in excess of the cost of funds, hence ensureing repayment of borrowed funds.”
