Why CBN harmonised public, private sectors’ reserve requirements

THE Central Bank of Nigeria (CBN) said the positive effects of the successful general elections on the economy and anticipated goodwill that would stem the spate of capital reversal, pressure in the foreign exchange market and stabilize the financial markets, aided its decision to harmonise the Cash Reserve Requirement (CRR) for the private and public sectors.
 
Besides, the prospects of monetary policy normalisation in the United States, with attendant increase in global interest rates and possible capital flow reversal could tighten further global financial conditions and create more pressure on the naira.
  
The CBN Governor, Godwin Emefiele, in a communiqué at the end of the Monetary Policy Committee (MPC) meeting, on Tuesday, said the continued glut in crude oil supplies amidst softening prices, anchored by sluggish global output expansion could further threaten foreign exchange earnings and accretion to external reserves over a much longer period.
  
Emefiele noted that monetary policy is gradually approaching the limits of tightening and would, therefore, require complementary fiscal and structural policies to spur further growth in the system.
  
But analysts at a securities trading company, in a reaction to the decision, said it was in exercise of patience to observe the fiscal policy direction of the incoming administration before taking steps to complement it with monetary policies.
  
The analysts at Afrinvest Securities Limited, in a note to The Guardian, signed by Ayodeji Ebo of the Research Group, pointed out that based on estimation from CBN’s February 2015 data, the implied CRR for public and private sector deposits stood at 35 per cent.
  
“As at February, public and private sectors’ deposits settled at N3.6 trillion (27.3 per cent) and N9.6 trillion (72.7 per cent) respectively. By implication, CBN has now unleashed the strings on deposits in the banking system, increasing available deposits by approximately N528 billion.
 
“Contrary to the expectation of the CBN that this act may lead to increased lending, we do not foresee any significant increase in lending to the real sector in the interim based on the evident risks that pervade the space,” Ebo noted.
 
According to him, based on management guidance, banks are not willing to increase lending expressively until the new administration settles and policy direction is ascertained.
  
He however, agreed that there might be increased investment in fixed income securities based on the current attractive yields, hence a slight drop in yields.
  
“We wish to highlight that the full implementation of the Treasury Single Account (TSA) may quarantine the total public sector deposits from the banking system, which is tantamount to a 100 per cent CRR on public sector deposits,” he added.
   
The majority of the 12-member MPC, had on Tuesday, voted to retain the Monetary 
Policy Rate at 13 per cent with a corridor of +/- 200 basis points around the midpoint and the Liquidity Ratio at 30 per cent, beside harmonising the CRR on public and private sector deposits at 31 per cent.
 
The apex noted the unsteady global recovery, with particular reference to theEuro Area and Japan and tepid growth conditions in China, which constitute additional drag on Nigeria’s crude oil export prospects.
  
“Consequently, the decline in Nigeria’s trade balance, which commenced in the second half of 2014, could persist over a much longer period with further implications for public revenues and external reserves. 
  
“The committee stressed the need for proactive measures to protect the reserve buffer; to safeguard the value of the domestic currency; and engender overall stability of the banking system,” the governor said.
  
He explained that the committee reviewed the current discriminatory CRR on public and private sector deposits, saying that it has not only constrained the policy space, but could also inspire moral hazard by private market participants.
  
“Consequently, it was recognized that while additional tightening measures may not be appropriate now to avoid overheating the economy, a harmonisation of the CRR was imperative in order to curb abuses and improve the efficacy of monetary policy’. he added.