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CRR Harmonisation: Experts Give Kudos, Knocks To CBN

The harmonisation of Cash Reserve Ratio (CRR) by the CBN last week has generated mixed reactions with many describing it as a policy that might achieve little in terms of assisting banks have enough funds to lend to the real sector

Sam Diala

Mixed reactions have continued to trail the recent harmonisation of public and private sector Cash Reserve Requirements (CRR) announced by the Central Bank of Nigeria (CBN) after the May 18 and 19 meeting of its Monetary Policy Committee (MPC).

The MPC, Tuesday harmonised the CRR of both public and private sectors to 31 per cent to improve monetary policy in the country. This was a reversal of existing 75 and 20 per CRR on public and private sector deposits respectively.

According to Mr Godwin Emefiele, CBN Governor, “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 the 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 CRR based on public sector or on private sector.

“It is basically for us to achieve the efficacy of the CRR regime of the monetary policy.” He said that the committee was optimistic that slow pace of economic activity would improve with the positive outlook of the general elections and progress made in fight against insurgency.

“Based on estimates, using the CBN’s February 2015 data, the implied CRR for public and private sector deposits stood at 35.0%. As at February, public and private sector deposits settled at N3.6trillion (27.3%) and N9.6 trillion (72.7%) respectively. By implication, the CBN unleashed the strings on deposits in the banking system, hence, increasing available deposits by approximately N528 billion.”

However, some industry experts who spoke to The UNION last week lauded the action while others considered it as a policy that borders on cosmetics and unproductivity. Although, it is expected that it would ease tight monetary stance of the deposit money banks (DMBs) which have been starved of loanable funds, analysts believe that the prevailing economic realities make the policy less helpful than it appears to be.

Mazi Okechukwu Unegbu, former President, Chartered Institute of Bankers of Nigeria (CIBN) said the policy would give some respite to the banks in terms of having loanable funds to service the economy. “The sum total is that you have more funds for lending now than before. However, that is offset by the negative side of the economy in terms of dislocation by way of inflation, interest rate. The banks will always consider average cost of fund which includes the cost of their building, fuel, plus some other hidden charges,” Unegbu said.

“When you add up all these, you can see that we have not solved any problem for ourselves because the economy has not really improved,” adding that the announcement effect that the outgoing government is leaving public debt, will discourage foreign investors who would prefer to wait to watch the situation.

Dr. Godwin Owoh, Executive Chairman, Society for Analytical Economics of Nigeria, says the CBN has not shown adequate credibility in enforcing policies and in engaging in transparent operation activities. What we are seeing is where the CBN is engaging more as an operator than as a regulator.

“If the CBN can pump in money from sources that are even not disclosed, how can you say you are genuinely pursuing structural balancing in liquidity flows? There is already a contradiction because they engage in injecting liquidity into the system, from sources that cannot be explained.

“Because such injections are directed through government, they create distortions. The CRR harmonization has no meaning because it is a temporary measure, it is not time-bound, and you cannot plan with it; it can change any time, any day.”

A capital market operator, Mike Mfon, told The UNION that the harmonisation would assist the banking industry in building funds that would be channeled into the productive sector of the economy. He argued that the measure should be monitored and, if possible, reduced further so that the role of the banks as financial intermediaries would have a meaning.

It would be recalled that the former CBN Governor, Mallam Sanusi Lamido Sanusi, introduced the CRR hike in July 2013 as a way of checking liquidity problem following the approach of the 2015 general elections.

He said, “As I speak to you, we got over N1.3tn or so in banks belonging to government agencies. Now, this is basically there at zero per cent interest and the banks are lending about N2tn to the government and charging 14 per cent.

“Now, if you want to discourage such behaviour, first of all is to basically take away that money and, therefore, the reserve requirement is to make sure that that excess liquidity in the banks’ balance sheet (are taken away), and it is just about six or seven banks that really account for the bulk of this, and we are not going to put them in distress.

“Secondly, this is just the beginning; if there continues to be spending and we are concerned about liquidity conditions, we foresee in the future continued increase in the Cash Reserves Ratio, which is possible as we continue to maintain tight liquidity conditions.

“Election year is everywhere not just only in Nigeria, but everywhere in the world. And in every election year, politicians spend money and spending money means pressure on exchange rate and pressure on inflation.”

CRR on public sector fund was later raised to 50 and 75 per cent, while public sector fund was raised from 15 to 20 per cent. All these notwithstanding, the Naira continued to suffer severe haemorage resulting in its devaluation of 8.3 per cent in November 2014, and further depreciation in February 2015 when the apex bank abolished the official foreign exchange windows.

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