Banks to keep 50% of govt deposits with CBN •Monetary policy rate retained at 12%
CBN Governor, Lamido Sanusi
The Central Bank of Nigeria on Tuesday expressed concern over the excess liquidity in the balance sheets of Deposit Money Banks, saying that henceforth, it would apply 50 per cent Cash Reserves Requirement to all government deposits with commercial banks.
The decision, which was announced by the Governor, CBN, Mr. Lamido Sanusi, was taken at the Monetary Policy Committee meeting held at the central bank’s headquarters in Abuja.
CRR is the amount of cash that banks have to keep with the central bank and is used to drain out excessive money from the system.
If the central bank decides to increase the CRR, the available amount with the banks reduces.
Sanusi, who said 10 out of the 12-member committee attended the meeting, stated that the CRR would be applied on all federal, state and local government deposits as well as all Ministries, Departments and Agencies.
For other private sector deposits, he said the CRR would remain at 12 per cent.
Also, by a vote of nine to one, the committee agreed to hold the Monetary Policy Rate at 12 per cent.
It also maintained the symmetric corridor around the MPR at +/-two per cent.
Sanusi said the introduction of the 50 per cent CRR to public sector funds became imperative in order to further tighten liquidity owing to increased spending in preparation for the 2015 elections.
The spending by politicians, according to him, may exert pressure on the exchange rate and inflation.
The governor noted that about N1.3tn of public sector deposits were currently with commercial banks, adding that such huge fund posed a risk to the current liquidity condition.
He said, “First of all, you have got liquidity in the banking industry. 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.”
The central bank boss said the next one year would be a very difficult period for monetary policy, adding that the country might see a further increase in interest rates instead of a reduction.
For instance, he said the CBN would continue to increase the Cash Reserves Ratio for public sector deposits until such accounts were returned back to the central bank.
He said, “The next 12 months will be difficult. We would have to respond at every stage and make sure that no matter what happens, we do not have stability pressures.
“So, this is a first step in addressing one major chunk. We have done it on public sector deposits and, then probably, if the government for instance decides that public sector account should come back to central bank then the CRR will be reviewed on that, but if it is out there, then CRR is 50 per cent.”
He said the increase in CRR for public sector deposits was a form of tightening as it would help the exchange rate during a rise in fiscal spending.
“We have done that without increasing the MPR and it is also a cost-effective way of managing money for us. It is time for us to begin to share the cost of monetary management,” Sanusi added.
When asked if there were no possibilities of reducing the MPR in the near future, he said, “There are two major concerns before us now. The fiscal position of government is a big problem.”
He added, “The deficit in the first half of this year is over N400bn compared to over N200bn last year. We have drawn over N700bn from Excess Crude Account and at a time when the government is borrowing more, you don’t expect the monetary authority to lower rates of interest.
“The second thing is that you’ve got fragile financial markets and we have lots of money in portfolios, which means any shock will begin to witness outflows that would put pressures on reserves and currency. And then, you’ve got elections coming up.
“So, the outlook for us suggests we should hold for now. There is a higher likelihood of rates going up than rates going down in the immediate future.”
On the controversy surrounding the approval of the CBN’s financial statement by the Financial Reporting Council, Sanusi said the board of the bank and not the FRC approved the bank’s reports.
He said, “On our accounts, the FRC does not approve our accounts. The board of the central bank had approved our account. The FRC is there to set accounting standards and to make sure they are improved on to meet international best practices.
“I am not aware of any issues that have been raised and I will like to put an end to all of that speculation. There is nothing like FRC not approving our account.
“There is nothing like a query on our account and there is nothing like complaints about IFRS academy.”
The CBN boss said the country’s external reserves rose to $47.99bn as of July 18, 2013 from $43.83bn at the end of December 2012, representing a rise of $4.16bn or 9.49 per cent year-to-date.
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