2015: CBN to withdraw N360bn from banks

Dr. Sarah Alade

The Central Bank of Nigeria on Tuesday moved to tighten liquidity ahead of the 2015 elections by raising the Cash ReservesRequirement for private sector deposits by 300 basis points from 12 per cent to 15 per cent.

The CRR refers to the amount of funds that the banks have to keep with the CBN and it determines the volume of cash in circulation within a given period of time. Whenever the central bank increases the CRR, the available amount with the Deposit Money Banks reduces, while the lending rates will increase.

The decision to increase the CRR for private sector funds was taken at the end of the Monetary Policy Committee meeting held at the central bank’s headquarters in Abuja on Tuesday.

The increase in private sector CRR, according to analysts, will enable the CBN to withdraw about N360bn from circulation through the DMBs. The private sectors’ deposits in the banks stand at about N12tn presently and the three per cent increase in the CRR will add up to N360bn.

Announcing the decision while briefing journalists shortly after the MPC meeting, the acting Governor of the CBN, Dr. Sarah Alade, said the decision was taken in order to consolidate the success of the monetary policy in attaining price and exchange rate stability.

She also said the potential headwinds in 2014; the ultimate goal of transiting to a truly low inflation environment; and the need to retain portfolio flows were also major factors that were considered before the decision was taken.

The acting governor said while the committee unanimously voted for further tightening of the monetary policy, members were divided on the instruments to be used in achieving the objective.

She explained that the committee saw a raise in the  private sector CRR as the best option that would achieve the monetary tightening needed presently without necessarily forcing an increase in lending rates through the hike in the Monetary Policy Rate.

Alade noted that while some members voted for an increase in the MPR to retain and attract more inflows, others felt that such an increase could have negative implications on access to credit and domestic growth.

For instance, she said, seven out of the nine members that attended the meeting voted to increase the CRR on private sector deposits by 300 basis points to 15 per cent, while two members voted to retain it at 12 per cent.

Alade said, “The committee unanimously agreed that a continuation of a tight monetary policy was needed to consolidate recent gains. Recent resurgence of core inflation in spite of the downward trend in headline inflation reinforces this position.

“Thus, a prudent monetary stance will also facilitate better reserves and exchange rate management in an environment where Fed tapering increases pressure on emerging economies’ financial markets.

“The MPC welcomed the growth expectations but expressed concern that the industrial sector had continued to lag behind.

“The committee noted that growth remained consistently in favour of the agricultural sector, noting that the continued achievement of relative exchange rate stability and single digit inflation in 2014, given the risks in the horizon, would require extraordinary measures.”

On the MPR and CRR on public sector deposits, the acting governor said the committee decided to maintain the current rate at 12 per cent and 75 per cent, respectively.

Asked if the central bank was considering the devaluation of the naira in the face of exchange rate pressure, she said the bank had no plans to do that.

Alade stated that the CBN was committed to exchange rate stability and would continue to defend the naira as long as inflows remained.

“The issue of devaluation is not on the table for now. And that is why we voted for increased CRR. We still believe that the interest rate can be used at the moment rather than going the devaluation way,” she added.

She  put the gross external reserves as of March 2014 at $37.83bn, compared with $42.85bn at the end of December 2013.

Alade attributed the decrease in the reserves to increased funding of the foreign exchange market in the face of intense pressure on the naira and the need to maintain stability.