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Liquidity mop up in a challenged economy




The four-month old monetary policy easing (expansionary) programme of the Central Bank of Nigeria (CBN) was unexpectedly cut short in March as the benchmark interest rate, also known as the Monetary Policy Rate (MPR) was reversed to 12 per cent after the November 2015 reduction to 11 per cent from 13 per cent.

The Monetary Policy Committee of CBN also raised the cash reserve ratio (CRR) for commercial banks to 22.5 per cent from 20 per cent, after reducing it by five per cent the same period from 25 per cent, and held bank’s liquidity ratio at 30 per cent.

The decisions simply meant that the quantity of money in circulation is effectively reduced, together with liquidity in banks’ possession and consequently, credit expansion ability of banks reduced. It also signaled the beginning of a period of focused attention on the quantity of money in circulation and how it affects the entire economy.

On the other hand, the upward adjustments of the MPR by one per cent would serve as compensation to investors for lowered real returns occasioned by inflation, as well as attract foreign private capital into the country. But financial market operators responded almost immediately, saying the adjustment was not enough to attract the anticipated investments.

For emphasis, the committee had in November 2015, lowered the MPR to 11 per cent from 13 per cent; reduced CRR from 25 per cent to 20 per cent; cut its Standing Deposit Rate for banks to four per cent (now seven per cent); and pegged its Standing Lending Rate for banks at 13 per cent (now 14 per cent), all in efforts to make more naira available for lending then.

Of course, just as before the last MPC meeting in March, the monetary authority has not let down the guard in wielding and tweaking its instruments towards impacting on liquidity level for desired direction and control level.

This is where the term “mop-up”, which upsets some analysts, comes in. The word mop-up is a term used to describe CBN’s deliberate action to regulate the quantity of money in circulation, using monetary policy instruments like treasury bill, bond auction, interest rate, among others, to achieve it.

Since the last decision of the policy makers, the monetary authority has been at it with regular exercise of treasury bills auction, redemption of matured ones, as well as rollover of matured instruments, together with bond.

For one thing, it brings about price stability, while checkmating inflation trend and curtails the excessive naira balance in the system that aids arbitrage in the foreign exchange market.

In fact, the CBN Governor, Godwin Emefiele, said part of the MPC’s considerations in the far-reaching rate decisions was the persistent fall in the naira exchange rate, which partly was attributed to excess liquidity and the latest report on inflation that hit 11.4 per cent (now 12.8 per cent).

CBN had earlier this year, said it would from January to March 3, auction its 364-day paper bills, worth N735.54 billion, which is part of its regular liquidity mop-up exercise.

Still, a new schedule of planned debt deals by the Federal Government in the second quarter of the year, showed that it may raise between N274b and N365b to tackle the current fiscal challenges.

Meanwhile, the Debt Management Office has kicked off its second quarter borrowing, as it raised N170b in bonds, made up of N40b paper maturing in 2036; N40b maturing in 2026; and N20b maturing in 2020 using the Dutch Auction System, but added N70b to the 2026 bonds in a non-competitive tender.

Again, CBN raised N167.51b through treasury bills last week, with varying maturities ranging from three months one year- N36.78b in the three-month category; N35b in the six-month paper; and N95.73b from the one year debt instrument.

These debt plans are also part of strategies to mop-up excess liquidity in circulation to curb rising inflation and finance the 2016 budget deficit, as well as help commercial lenders manage their liquidity.

Emefiele noted that the average inter-bank call and Open Buy-Back rates between January 25th and end of February 2016, stood at 1.43 per cent and 2.68 per cent, an indication of liquidity surfeit in the banking system.

Again, he said the new rate regime forms part of strategies to address the supply constraint in the foreign exchange market, as yields on domestic instruments have to be competitive to attract the much-needed foreign exchange inflows.

In less than a week after the rate decision, no less than N409.7b were withdrawn from circulation, with the inter-bank lending rates rising to 20 per cent, as banks, in an effort to meet the obligation for the new CRR requirement, scrambled for available cash in the money market, thereby causing a spike in the Open Buy-Back (OBB) and Overnight rates to 20 per cent against the then subsisting 6.75 per cent and 7.33 per cent.

However, analysts said that the decision to move up CRR by 2.5 per cent to 22.5 per cent, after it was earlier reduced from 25 per cent to 20 per cent four months ago, showed that the operating environment has remained unattractive for loan growth.

The Head of Investment Research at Afrinvest Securities Limited, Ayodeji Eboh, said the increased rate has worsened matters relating to structural factors, pushing costs up as price of funds rise.

He also faulted the suggestion that increase in banking system liquidity is fundamentally driving the pressure on exchange rate, as high subscription at CBN interbank auctions continued, despite intermittent treasury bills issuance conducted.

The Associate Research at Eczellon Capital Limited, Mustapha Suberu, had earlier predicted that with the action of the MPC, there is going to be an increase in money market rates on the back of the squeeze in banking system liquidity, which would translate to a higher cost of funds for financial institutions, as well as their customers, and further pressure their net interest margin.

The succor the economy is likely to witness in the short term, he said, would be stability in the value of the naira, especially at the parallel market, as reduced naira liquidity would likely cushion demand for the dollar.

“It is obvious that money market rates have risen sharply post-MPC meeting. The moderation that was witnessed at the end of March and so far in April could be tied to increased liquidity in the market through maturing treasury instruments, coupled with a slowdown in Open Market Operation auctions by the Central Bank of Nigeria. In all, the average money market rate is higher post-MPC, compared to periods before March 22.

“The Naira has also remained relatively stable post-MPC compared to earlier trading days in March. The value of the currency has oscillated between N322/$ and N324/$ (currently N310 with the mix of Nigeria-China currency deal), compared to the N385/$ earlier in March.

The President and Chief Executive Officer of Time Economics Limited, Dr. Ogho Okiti, on the other hand, said the decision expectedly, had positive implications for portfolio flows and re-pricing of yields in the bonds market through the weeks.

“The committee’s decision to narrow the asymmetric MPR corridor is geared towards encouraging banks to deposit excess funds with the CBN. Following the MPC decisions to reign on excess liquidity in the banking system by increasing the asymmetric corridor to +200/-500 basis points from +200/-700 basis points, CBN’s net Standing Deposit Facility effectively witnessed an upsurge of funds from N84.2b recorded four days before the decision to N106b two days after the decision,” he said.

The N21.8b increase in deposits at CBN by banks, representing 25.8 per cent sharp response to the seven per cent interest rate offered to banks to reduce their liquidity position also showed financial institutions’ preference for risk free investment to private sector lendings, which has been long labelled “risky.”

Also, on the decision to increase the benchmark interest rate, he noted that bond yields towards the end of March spiked across the curve, as yields on benchmark 20-year bonds increased by 55 basis points (bps), to 12.7 per cent; while yields on 10-year bonds increased by 45 bps, to 12.65 per cent.

“The 5-year paper bond yield –with the most liquid maturity– rose by 41 bps, to 11.7 per cent. Bond yields on 1-year treasury bills and 91-days treasury bills increased to 9.56 per cent and 6.10 per cent March 2015

“So effectively, the MPC decisions of last month has so far relatively produced desired outcome in terms of repricing of yields in the bonds markets and increasing commercial banks’ deposit with the CBN”, he said, as well as reducing the quantity of money in circulation.

Emefiele, though acceded to the fact that the quantity of the naira in circulation needed “trimming”, given the inflationary trend then, but also affirmed that “the rising inflationary pressure was traced to the lingering scarcity of refined petroleum products, exchange rate pass through from imported goods, seasonal factors and increase in electricity tariff.”

But true to his word, the latest report of the National Bureau of Statistics (NBS), barely three weeks after the decision, noted that the trickling effects of the lingering foreign exchange crisis and scarcity of the Premium Motor Spirit, as well as the adjustment in the electricity tariffs nationwide drove food prices up, resulting to a new record of inflation near four-year high of 12.8 per cent.

Besides, the inflation’s trend has been marked by over 100 basis points increase for two consecutive months of February and March, but has notably defied the liquidity mop ups of the apex bank, an indication that the inflation is not demand driven, but cost push.

“The higher price level was reflected in faster increases across all divisions. Transportation costs, the planting season, and foreign exchange movements created significant upward pressures on the Food index in March.

“The Food index increased by 12.7 per cent, up by 1.4 per cent points from rates recorded in February as all major food groups, which contribute to the food sub-index increased at a faster pace.

“Imported items, as well as, other domestic shocks continued to have ripple effects across many divisions that contribute to the Core Index. The index increased by 12.2 per cent in March, roughly 1.1 per cent points from rates recorded in February.

“The Food sub-index continues to record upward pressure from both imported foods, as well as, cereals. In March, the Food index increased by 12.7 per cent year-on-year), 1.4 per cent points higher from rates recorded in February and reaching a year-on-year high last recorded in May 2012.
“The highest price increases were recorded in the fish, vegetables, and bread and cereals groups for the third consecutive month. On a month-on- month basis, the Food sub-index increased by 2.3 per cent in March, 0.9 per cent points higher from rates recorded in February,” NBS said.

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