Even after the first increase in Cash Reserve Requirement (CRR) on public sector funds by 50 percent in July last year, by the Central Bank of Nigeria (CBN), the Nigerian lenders’ government deposits rose to N5.9 trillion December 2013, representing 148 percent increase when compared with about N1.99 trillion previously.
The increase in public sector CRR to 50 percent in July 2013, according to Garba Abdul-Ganiyu, member, Monetary Policy Committee (MPC) CBN, was complemented by financial system stability supportive measures.
“We now know as anticipated that the rise in open buy back (OBB) and interbank rate was short-lived. Also, that the short-term interest rates (maximum and prime lending rates) were flat while the treasury bills rate has trended downwards. In addition, the composition of the deposits of the DMBs has been shifting significantly in favour of public sector deposits which rose by 148 percent to N5.9 trillion by ending of December 2013,” he said.
In voting to increase the CRR on public sector deposit to 75 percent, he expects the fiscal authorities to speed up the process towards the Treasury Single Account (TSA), which he has consistently argued is “indispensable (i) to avoiding a high interest rate trap and (ii) to preparing the economy to soften the likely adverse effects of the low interest rate trap imploding.”
In her personal statement for the first MPC of the year, Sara Alade, deputy governor, economic policy, CBN, said “with benign inflationary outlook, high structural liquidity and sustained pressure on the foreign exchange, I will support a no increase in Monetary Policy Rate, a 75 percent increase in public sector deposits Cash Reserve Requirement (CRR) and a review of the midpoint in exchange rate band.”
According to her, banking system deposits at the CBN deposit facility has consistently been high.
Even with OMO operations, Interbank and OBB rate still traded below the standing deposit facility rate at 10.54 percent and 10.23 percent, respectively, as of January 10, 2014.
However, lending rates remained high at over 23 percent, suggesting that care must be taken to manage the structural liquidity and the structural impediments to credit growth. In addition, pressure on the exchange rate window is impacting the foreign exchange reserves negatively. Therefore, a balance between defending the naira and saving the reserve must be struck for economic stability.
Barau Suleiman, deputy governor, corporate services, CBN, said in his personal statement that one of the key challenges facing MPC was narrowing the spread between deposit and lending rates. While market rates have remained stable, the spread between deposit and lending rates has remained disturbingly high. The shared services initiative of the banking industry when fully implemented would help to narrow spreads.
Nigerian banks have also one of the highest costs of doing business, but the weak state of the fixed income segments of the capital market have also reduced options available to borrowers and this has led to the distortion in the cost of capital by banks who now literally play in quasi-oligopolistic market scenario.
Kingsley Moghalu, deputy governor, financial system stability, CBN, voted among others to increase the CRR for public sector deposits from 50 percent to 75 percent, and the CRR for private sector deposits from 12 percent to 15 percent.
He said monetary tightening through the CRR will help control liquidity and contribute further to structural reform of bank lending to the real sector, instead of the pursuit of public sector deposits. It will also help conserve declining foreign reserves.
Here, however, it is important to keep concerns about financial stability in mind, as banks and bank borrowers have long borne the brunt of fundamental structural problems in the decision-making paradigm of the MPC.
