By 
The Federal Government’s concerted efforts to mitigate the rising inflationary pressures entail the Central Bank of Nigeria (CBN) executing a significant cash mop-up of N5 trillion from the banking industry. This move follows the elevation of banks’ Cash Reserve Ratio (CRR) from 32.5 percent to 45 percent, aimed at stemming inflationary trends.
In a recent virtual meeting termed the Foreign Portfolio Investors Call, jointly organized with NGX Group, key officials including CBN Governor Mr. Olayemi Cardoso and Deputy Governor for Economic Policy, Mohammad Abdullahi, engaged with foreign portfolio investors to address concerns regarding recent foreign exchange market reforms and the 400 basis points increase in the Monetary Policy Rate (MPR).
During the session, CBN Deputy Governor Abdullahi indicated that the banking system faces a deficit of N5 trillion to meet the 45 percent CRR requirement. However, he assured that the implementation of the new CRR would be gradual to prevent disruptions in the industry. He clarified that prior to the MPC decision, the effective CRR stood near 40 percent, with some banks already exceeding the 45 percent threshold, necessitating refunds for the surplus while others need to bolster their cash reserves.
The estimated N5.0 trillion excess liquidity, reflective of the surplus system liquidity beyond the initial CRR range, is anticipated to adversely impact the liquidity of many banks.
The decision to tighten liquidity stems from the escalating inflationary trajectory, which reached 29.9 percent year-on-year, the highest since the return to democracy in 1999. Analysts foresee sustained inflationary pressures attributed to exchange rate fluctuations, mounting energy costs, and enduring fiscal imbalances.
In defense of the substantial MPR and CRR hikes, CBN Governor Yemi Cardoso underscored the disruptive effects of deficit financing by the Federal Government through Ways & Means, along with the apex bank’s substantial interventions in the real sector, exceeding ¦10.0 trillion. He emphasized the need for collaboration with fiscal authorities to address structural inefficiencies in the foreign exchange market and manage non-monetary factors effectively.
Afrinvest West Africa analysts recommend prioritizing policy measures to minimize distortions, focusing on enhancing supply rather than countering liquidity symptoms. They anticipate a bearish repricing of fixed-income yields, particularly on short-dated bills, and expect a higher interest environment amid liquidity constraints and increased Standing Lending Facility (SLF) costs.
CBN reassured foreign portfolio investors of free entry and exit from the forex market, emphasizing stability and reasonable price discovery. The commitment to achieving price stability remains paramount, with MPC members unanimous in the drive to curb rising inflation. Policy consistency and measures introduced in the forex market reflect extensive debate and firm conviction in the chosen direction.
Furthermore, CBN Deputy Governor Abdullahi announced plans to review upward interest rates on Treasury bills (TBs) in alignment with the MPR hike. The CBN will also increase the frequency and size of Open Market Operations (OMOs) to expedite liquidity mop-up and provide investment instruments for foreign portfolio investors.
Comments