…raises banks’ cash reserve to cage inflation, liquidity
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), yesterday raised a red flag on Nigeria’s public debt of N26.215 trillion. Giving tacit caution on need to watch rising public debt, MPC committee of eleven members admonished fiscal authority on imperative of beefing up fiscal buffers as against old practice of sharing all revenue accrual into federation account to three tire of governments.
This was as CBN’s Loan to Deposit Ratio policy has advanced N17.6 trillion credit to real sector as of December 2019 as against N15.5 trillion in May 2019 indicating N2 trillion growth.
At yesterday’s MPC, the first in 2020, the committee approved upward review of Cash Reserves Ratio (CRR) to 27.5 per cent from hitherto 22.5 per cent. The decision to adjust CRR upward was predicated on mopping up excess liquidity in the system and rein in current uptick in inflation trend which stood food supply.
“The committee applauded the government for the recent signing of the 2020 finance Act which opens a new vista of opportunities in the public finance management. “The MPC however cautioned that public debt was rising faster than both domestic and external revenue, noting the need to tread consciously in interpreting the debt to GDP ratio.
“The committee also noted the rising burden of debt services and urged the fiscal authorities to strongly consider building buffers by not sharing all proceeds from the federation account at the monthly FAAC meetings to avert the macroeconomic downturn in the event of an oil price shock,” Emefiele said.
Towards this end, the CBN governor said MPC members admonished government to gradually reduce reliance on oil receipts and focus on revenue diversification through reforms of the tax system. The body advised government to rationalise fiscal expenditure towards reducing the current excessively high cost of governance. at 11.89 per cent as of December, 2019. Governor of Central Bank, Mr. Godwin Emefiele, who briefed media on the MPC decisions, said with exception to the CRR adjusted to 27.5 per cent ; all other key parameters : lending rate- Monetary Policy Rate ( MPR) was retained at 13.5 per cent, liquidity ratio at 30 per cent across asymmetric corridor +200 -500 basis point around MPR. Emefiele said MPC members expressed concern about rise in headline inflation and concluded that it was fuelled by both monetary and structural factors.
“The monetary policy thus, called on fiscal authorities to speedily address legacy structural impediments giving rise to upward trending price development. “Amongst these, the committee identified infrastructure deficit and the long standing clashes between herdsmen and farmers which are constraining domestic production and contributing substantially to a rise in food inflation. It therefore urged the federal government to relentlessly seek innovative ways of addressing security challenges in order to boost aggregate Justifying decision to hike CRR to 27.5 per cent, Emefiele said it was done to control inflation and mop up liquidity.
He said: “You will all recall that in January 2017, inflation picked at 18.7 per cent and the monetary policy realising that price and monetary stability remains it’s core mandate certainly could not sit idle and allow inflation to continue to rise particularly above 12 per cent inflation rate.
“The growth was retarded , so monetary policy took those decisions to be very aggressive with tightening and using all forms of monetary policy instruments available to the bank to drive down inflation. “Luckily we were able to bring this from 18.72 per cent in January 2017 to about 11 per cent. For some period, inflation remains somewhat sticky downward at 11 per cent but suddenly from around August last year we began to see uptick in inflation again, ticking up to about 11.98 per cent which is the rate that we saw in December 2019.
“In reviewing inflation, monetary policy committee felt inflation was already getting to the level considered a threshold capable of retarding growth. “The MPC felt compelled that we need to begin to look at what can be done to reverse the trend of this rising level of inflation and prices , and hence committee felt in it’s wisdom, that realising that there is a lot of liquidity in the market particularly also coming from not only the fiscal that is also spending to fund it’s budget.
“But also the fact that some actors have been excluded from the OMO and also insisting that OMO particularly for the local individuals and corporate will not be allowed any longer. “Committee felt that there will be a lot of liquidity in the market and there was a need for the bank to do something to mop the excess liquidity to level that it considers optimal to be able to run the economy in a way that the level of excess liquidity does not become injurious to the economy.
“That is the reason the committee adopts the blunt process of taking this liquidity out by increasing the CRR from 22.5 per cent to 27.5 per cent,” he added. However, he added that beyond controlling inflation , the committee was also concern about the need for banks to lend credit to real sector of the economy.
“The committee also said: listen we must remain committed and focused on the fact that deposit money banks must be compelled like we are using prudential to ensure that they continue to grant loans to the private sector of the economy. “You would have observed that as a result of Loan to Deposit Ratio we have seen loans grow from N 15.5 trillion in May to 17.6 trillion in December 2019 that is a N2 trillion growth. In the course of reading the communiqué. “I made it clear the various sector; manufacturing, agriculture, retail, all sector that have benefited from this initiative. “And committee felt that, yes whereas we are trying to remove excess liquidity from the market so as to operate within an optimal level of liquidity that is needed for the economy.
“That the CBN should continue to push on Loan to Deposit ratio since that has already giving us the kind of result that we expect. “So, it’s like , let’s keep doing what we are doing but do not remove your eyes from the ball regarding the excess liquidity and what needed to be done to take this liquidity out so this economy can run in an optimal way that does not create inflationary pressures , and by extension exchanging pressures on the economy.”
Emefiele allayed fears about declining in foreign reserves hovering at about $38 billion and assured that economy was stable. “It is important for us to know that reserves is there to meet the country’s obligation. So from time to time reserves will go up, reserves will come down.
“Yes, it is no doubt , the drop has become noticeable that people are beginning to say will they result in adjustment in the currency at a reserve level of about $38 billion today and crude price at above $ 67, 60, 65, sometimes hit 70.
“We believe that we will be able, and we are saying that we should continue to sustain the existing foreign exchange management and stability that we’ve seen in the market. There is no need for anybody to ever think that an adjustment will happen.
“The CBN is able to meet all obligations. The reserves level is high and strong enough to be able to meet all obligations in the economy and so there is no need for anybody to contemplate that. “We believe crude price at above $ 60 today at almost about 66 to 67 sometimes hitting 70 is a strong level that can be used to support the economy and also continue to sustain the stability that we see in foreign exchange market today,” the CBN governor assured. Meanwhile, the Debt Management Office (DMO) had last week stated that the nation’s total debt as a percentage of GDP, which stood at 18.47% as at September 2019: “Was well within the limit of 25% and fares better in comparison with the Debt/GDP ratios of countries such as the United States of America, United Kingdom and Canada with ratios of 105%, 85% and 90% respectively for the same period.”