Many bankers and analysts were taken by surprise when, on the 24th of April, the CBN debited 29 commercial banks in Nigeria to the tune of N1.4 trillion. As Nairametrics reported, this followed the banks’ failure to meet the Cash Reserve Ratio (CRR) requirement.
Recall that the CRR was recently raised to 27.5% by the Monetary Policy Committee of the CBN. And while some people did kick against this, the CBN had its reasons for the decision, including the need to guard against inflationary pressures.
But is this the right time to enforce the directive on CRR?
As you may well know, the Coronavirus pandemic has thrown the Nigerian economy into a complete state of chaos. Some analysts believe one of the things needed the most to ensure a quicker recovery is high liquidity in the system.
Unfortunately, CBN’s move did exactly the opposite of this. How then does the apex bank expect the economy to recover? This is the same question our economic commentator, Kalu Aja, threw back at us when we asked him to discuss the development. He said:
“It’s just optics. If you are in a crisis where liquidity is tight because of limited commerce, why take away liquidity from the market? All over the world, Central Banks are injecting liquidity in. This is definitely not a good move at this point.
“However, Governor Emefiele is worried about inflation which is his core responsibility. There is also the real fear that naira will start buying $ and push up exchange rates. So, he is starving the foreign exchange market of cash.”
Starving the foreign exchange market of cash?
Before the devaluation in March, the CBN last devalued the currency in 2017. Since then it has been adamant to effect another devaluation keeping the exchange rate relatively stable at N366/$1 at the interbank market.
Back in March when pressure was beginning to mount on the naira due to fallouts from the COVID-19 pandemic, the apex bank issued a statement threatening to “invoke the full weight of applicable sanctions on any persons” found guilty of speculating about an imminent devaluation.
About two weeks later, the CBN devalued (adjusted) the naira from N305 in the “official” market to N360/$1. There is still pressure to devalue more as analysts believe the naira is still overvalued. But while the CBN is still be trying its best to keep the exchange rate down, the rate appears to have assumed a life of its own in the parallel market.
Following the last devaluation back in March, the naira was exchanging at about N370 to a dollar. The rate has since declined to N500 to a dollar at the forward market as of April 24. The CBN could be trying to dissuade speculation in the market by enforcing the CRR at a time when some people believe the move to be counterintuitive.
Focus on the possible (negative) impacts of CBN’s CRR debit
Having considered the likely reasons behind the CBN decision, it is only apt to also examine the adverse effects it could have. Some of these negative implications are listed below:
- Lower liquidity in the system
- Reduced funds available to banks
- Higher finance cost for banks
- Bank’s inability to lend to the real sector
- A slower pace of economic recovery post COVID-19
These points were made by Olufemi Hassan, a former banker and Principal Consultant at Hatytude Consultancy Services Limited, who spoke to Nairametrics on the phone. He said:
“The banks are expected to have a percentage of their deposits given out as loans. So, once the CBN finds out that banks’ are not meeting the loan to deposit ratio expected of them, the penalty would be to debit the CRR.
“What this implies is that it reduces the deposits available to the bank’s and this naturally will impact banks’ cost of fund in the money market. This is because the money debited in CRR is sterilised. Banks would then have to obtain funds from elsewhere, albeit at higher costs.
“Note that these banks are likely to pass that cost to their borrowers in the form of higher interest rates on loans. But then again, in the event of a CRR debit, banks would not even have the required loan book size and as such cannot give loans.
“So typically, the CRR debit will definitely increase the weighted average of cost of funds for banks. And banks may not find it easy to pass this cost to their borrowers.”
It should be noted that on Monday, the CBN refunded part of the money in a bid to maintain liquidity in the market. Reacting to this, Hassan said it was not out of place. In other words, the development was expected because the CBN’s job also entails ensuring liquidity in the market.
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