In recent reports, efforts by the Federal Government to contain the rising inflation may lead to N5 trillion cash mopping up from the banking industry as the Central Bank of Nigeria, CBN implements the hike in banks’ Cash Reserve Ratio, CRR to 45 percent. The CRR, which represents banks’ cash reserves for purposes of meeting cash obligations on demand was moved from 32.5 percent to 45 percent in an apparent bid to curtail inflation. The apex bank is allegedly working with some foreign portfolio investors, FPIs, to address concerns over recent reforms introduced in the foreign exchange market as well as the 400 basis points hike in the Monetary Policy Rate, MPR.
This is one of the outcomes of a virtual meeting, tagged Foreign Portfolio Investors Call, organized in collaboration with NGX Group, which was addressed by the CBN Governor, Mr. Olayemi Cardoso, Deputy Governor, Economic Policy, Mohammad Abdullahi, and moderated by the Group Managing Director/ CEO of NGX Group, Mr. Temi Popoola. While speaking at the meeting with FPIs in response to inquiries about the impact of the hike on banking system liquidity, CBN Deputy Governor Abdullahi said that the banking system has a shortfall of N5 trillion to meet the 45 percent CRR. However, he said the CBN will not debit the banks N5 trillion at once adding that the apex bank will implement the new CRR in a way that will not be disruptive to the industry. He disclosed before the MPC decision, the effective CRR for the industry was close to 40 percent. He added some banks already have surpassed the 45 percent CRR and they would be refunded the excess while banks with shortfall will have to build up their cash reserves. Excess liquidity, the estimated N5.0 trillion which represented the outstanding system liquidity in excess of the initial CRR range is expected to impact the liquidity of many banks adversely. The decision to tighten came against the backdrop of de-anchored inflationary trend which rose to 29.9 percent year on- year, the highest since the return to democracy in 1999. However, financial analysts project the inflation rate would remain elevated in the near term amid persisting exchange rate pressure, rising energy costs, and sustained fiscal imbalances. In defending the huge jump in MPR and CRR, the CBN Governor, Yemi Cardoso, highlighted the disruptive impact of deficit financing on the Federal Government by Ways & Means, and the direct intervention of the apex bank in the real sector which is estimated more than 10.0 trillion.
He also noted the structural inefficiencies within the foreign exchange market, and the need to collaborate strongly with fiscal authorities to effectively manage non-money factors. Analysts’ recommendations Commenting on this development, analysts at Afrinvest West Africa, a Lagos-based investment house, said: “We suggest that in addressing inefficiencies, the apex bank prioritizes the use of policy to minimize distortions and should remain focused on improving supply rather than countering the symptoms of illiquidity. “In assessing the impact on markets, we anticipate an immediate and strong bearish repricing of fixed-income yields especially on short-dated bills. “Furthermore, expectations of higher interest environment over the near-term coupled with liquidity squeeze amid costlier Standing Lending Facility (SLF) access should strengthen bearish sway”.
Free entry, and exit for FPIs Meanwhile, Cardoso assured the FPIs of free entry and exit from the forex market. He added that the focus of the apex bank is to ensure the stability of the exchange rate and ensure reasonable price discovery. He also reiterated the commitment of the CBN to achieving price stability adding that the MPC members are unanimous on the need to tame rising inflation and the 400 basis points hike in MPR is a strong signal to this effect. Cardoso assured the FPIs on policy consistency adding that the various measures introduced by the CBN in the forex market were the product of extensive debate and strong conviction that is the right direction to go. Higher interest rates in TBs Speaking further at the meeting, Abdullahi assured the FPIs the CBN will from today review upward interest rates on Treasury bills, TBs, in tandem with the hike in MPR. He further disclosed that from today, the CBN will increase the frequency and size of Open Market Operations, TBs, to expedite liquidity mop-up and provide instruments for FPIs to invest.
