CBN harmonises public, private CRR at 31%

Central Bank of Nigeria.

Central Bank of Nigeria.

20 May 2015, Abuja — The Monetary Policy Committee, MPC, yesterday harmonised the Cash Reserve Requirement, CRR, of both public and private sectors to 31 per cent to improve monetary policy in the country.
The Central Bank of Nigeria, CBN, Governor, Mr Godwin Emefiele, announced this while addressing newsmen on the outcome of the committee’s meeting in Abuja, yesterday.

He said: “Nine members voted to harmonise the public and private sector’s CRR at 31 per cent. Two members voted to remunerate the portion of the CRR. All members voted to retain all other decisions taken at the last meeting of the monetary policy committee while improving the implementation of the CRR regime.”

According to him, the committee voted to retain the MPR at 13 per cent, with a corridor of plus or minus 200 basis point around the midpoint, adding that the liquidity ratio was also retained at 20 per cent.

The governor said harmonisation of the CRR was imperative to curb abuses and improve the efficacy of the monetary policy.
Cash Reserve Requirement, CRR, indicates the percentage of deposit money banks’ cash that they must keep with the CBN as a means of controlling the amount of money with the banks. The action is to limit the ability of banks to create money. With the harmonisation, the banks will now have more funds at their disposal to lend. Increased lending to the private sector will boost production and expand the economic base.

He explained that before the harmonisation, what was obtainable was CRR, based on private sector at 20 per cent and on public sector, 75 per cent.

He said: “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. The expectation that the new CRR may lead to increased real sector lending may not actually be the case in the interim, given the evident risks that pervade the space.

Based on management guidance, banks are not willing to increase lending expressively until the new administration settles and policy direction is ascertained.

On the other hand, the additional liquidity into the system may be channelled to the fixed income market given the current attractive yields. This in turn may help push down yields within the short term. The full implementation of the Treasury Single Account (TSA) may also reduce the quantum of public sector deposits in the banking system.

Interest rate’ll remain high
The President of Lagos Chamber of Commerce and Industry, LCCI, had said, after the last MPC meeting, that the implication of the MPC decision to sustain a regime of tight monetary policy regime was that interest rate would continue to remain high and put pressure on operating costs in the economy.

At a parley with pressmen in Lagos, President of LCCI, Alhaji Remi Bello, said MPC at the end of its last meeting, decided to sustain the tight monetary policy regime and retained Monetary Policy Rate (MPR) at 13 per cent; CRR on Private Sector deposits at 20 per cent; CRR on Public Sector deposits at 75 per cent; and liquidity ratio at 30 per cent.

He said: “The implication is that interest rate would continue to remain high and continues to put pressure on operating costs in the economy. For now, lending rate of commercial banks, including fees and charges, range between 22 and 34 per cent depending on the customer profile, tenor and collateral quality. High interest rate is a concern we have expressed at every turn in our advocacy activities engagements.”

The harmonization may just be the beginning of CBN to relax the tight monetary policy it had pursued in the last seven years.
Until, the harmonization, the Public Sector CRR was 75 per cent, while private sector deposit CRR was 20 per cent.

Why harmonisation
Emefiele explained that the decision to harmonise the two reserve requirements was to achieve greater efficiency in the push towards a more stable money market in the country.

According to Emefiele, “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 participant. Consequently, it was recognised that while additional re-tightening measures may not be appropriate for now to avoid over-heating the economy, the harmonization of the CRR was imperative to curb abuses and improve the efficacy of monetary policy.

“In view of this development, the committee decided by a unanimous vote to retain the current stance of tight monetary policy. Whether private or public sector, it important to achieve efficacy of the CRR regime on monetary policy.”

“The MPC voted to retain the MPR at 13 per cent, with a corridor of + /-200 basis points around the mid-point; liquidity ratio retained at 30 per cent and harmonise the public and private sector deposits CRR at 31 per cent.

“Monetary policy is gradually approaching the limits of tightening and would, therefore, require complementary fiscal and structural policies.”

Emefiele said his team was deeply concerned over the lackluster performance of the external sector arising from a number of significant global shocks.
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 for public revenues and external reserves.

“In the 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 reasons for concern, according to him, were, “the prospects of monetary policy normalization in the US with attendant increase in global interest rates and accentuating capital flow reversal which could further exacerbate tightness in global financial conditions and create further pressure on the naira.

“The continued glut in crude oil supplies amidst softening prices, anchored by sluggish global output expansion could further threaten foreign exchange earnings and accretion to external reserves over a much longer period. A near- term rally in oil prices is further undermined by the diminishing market power of the Organization of the Petroleum Exporting Countries (OPEC).
*Emma Ujah – Vanguard

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