The recent harmonization of public and private sector Cash Reserve Requirements (CRR) by the Central Bank of Nigeria (CBN) will result in high liquidity position of deposit money banks (DMBs) as the apex bank is set to release N500 billion to the lenders following the relaxation of the tight monetary policy stance.
The CBN Monetary Policy Committee (MPC) meeting of May 18 and 19 announced the harmonization of the CRR for public and private sector funds of 75 per cent and 20 per cent respectively to 31 per cent to loosen the tight monetary stance on the banking system. The CBN Governor, Mr. Godwin Emefiele, made this development known while addressing journalists on the outcome of the committee’s meeting on Tuesday in Abuja.
He noted that nine members voted to harmonize the public and private sector’s CRR at 31 per cent while two members voted to remunerate the portion of the CRR. “All members voted to retain all others decisions taken at the last meeting of the Monetary Policy Committee while improving the implementation of the CRR regime”. Going further, he said that the committee voted to retain MPR at 13 per cent with a corridor of plus or minus 200 basis point around midpoint. He added that the liquidity ratio was also retained at 20 per cent.
The governor further said that the harmonization of the CRR was imperative to curb abuses and improve the efficacy of the monetary policy and explained that before the harmonization what was obtainable was the CRR based on the private sector at 20 per cent and on public sector at 75 per cent. “What we have done is to have a composite rate. There is no need for us to have CRR segregated for the private sector and public sector deposit. The 31 per cent is just a composite rate which just brings it together and there is no need for anybody to continue to wonder whether we are taking the CRR based on private sector or on public sector. It is basically for us to achieve the efficacy of the CRR regime of the monetary policy.”
He noted. He said that the committee was optimistic that the slow pace of the economic activity would improve with the positive outlook of the general elections and progress made in the fight against insurgency. He added that the positive outlook of the election would likely help to reduce the pressure on the foreign exchange market. He noted that the average naira exchange rate was relatively stable both at the interbank and Bureau de change (BDC) segment of the economy. Emefiele explained that the decision to harmonize the two reserve requirement was to achieve greater efficiency in push towards a more stable money market in the country.
He further said that “The current discriminatory CRR on public and private sector deposits has not only constrained the policy space but could inspire moral hazard by private market participants. Consequently, it was recognized that while additional retightening measures may not be appropriate for now to avoid over heating of the economy. In view of this development, the committee decided by unanimous vote to retain the current the current stance of tight monetary policy. Whether private or public sector, it is important to achieve efficacy of the CRR regime on monetary policy”. Emefiele said the monetary policy is gradually approaching the limits of tightening and would therefore require complementary fiscal and structural policies.
He said his team is concerned about the performance of the poor external sector arising from a number of significant global shocks. In his words, “The decline in trade balance which commenced in the second half of 2014 could persist over a much longer period with further implications on public revenues and external reserves. “In light of these developments therefore, the committee stressed the need for proactive measures to protect the reserve buffer to safeguard the value of the domestic currency and engender overall stability of the banking system.”
Other issues for concern according to him were the prospects of the monetary policy normalization in the US with attendant increase in global interest rate and accentuating capital flow reversal which could further exacerbate tightness in global financial conditions and create further pressure on the naira. The Cash Reserve Requirement is the percentage of deposit bank’s total cash that they must keep with the CBN. This is done to control the amount of money in circulation in the country. with the harmonization, the banks would have more money at their disposal. This would increase lending by banks to the private sector which would help improve productivity in the economy.