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The 60% loan-to-deposit ratio: Matters arising

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The Central Bank of Nigeria’s (CBN’s) last month’s directive that all deposit money banks (DMBs) should maintain a minimum loan to deposit ratio of 60 per cent by September 30, 2019 to promote investment in the real sector and enhance economic growth is instructive. The apex bank also reduced to N2 billion from N7.5 billion the maximum remunerable daily placement by a bank at the CBN Standing Deposit Facility (SDF) at the interest rate prescribed by the Monetary Policy Committee (MPC) from time to time. The latter directive is designed to plump up loanable funds.

Surely, lending to the real sector including “small and medium enterprises, retail, mortgage and consumer lending” would probably improve. However, the extent of improvement relative to the needs of the economy would without doubt leave much to be desired. At its subsequent meeting in July, the MPC retained the monetary policy rate (MPR) at 13.5 per cent, the SDF at 8.5 per cent, the cash reserve ratio at 22.5 per cent and the liquidity ratio at 30 per cent.

The apex bank directive and MPC decisions call for some examination. First, instead of contritely coming clean for being accessories after the fact of steering this bountifully endowed country to the status of the poverty capital of the world, the apex bank has banked on the two circulars above to avoid taking immediate steps towards reversing the deepening economic suffering in the land. Note that despite its grandstanding with the circulars, the CBN does not expect them to produce much positive result because the apex bank staff have forecast that the GDP would grow at just 2.39 per cent in the third quarter and 2.56 per cent in the fourth quarter of 2019. Such outcome would not be significantly different from the pre-circular estimated growth rate of 2.01 per cent in the first quarter and the forecast of 2.39 per cent in the second quarter of 2019.

Second, the MPC soft-pedalled on the hitherto touted panacea of apex bank usurpatory interventions in all socio-economic spheres by stating that “The continued intervention by the bank in the real sector is expected to partly ameliorate the downside risks (to the growth projections) only in the short-run while sound fiscal policy is expected to drive growth in the medium to long-run…The MPC called on the fiscal authorities to expedite action on expanding the tax base of the economy to improve government revenue and stem the growth in public borrowing.” Why should MPC employ rigmarole rather than display a little professional integrity by endorsing the long proffered solutions of collecting forex access tax and slashing interest rates (a monetary duty) via the adoption of a single forex market?

Third and thankfully, the makeshift circulars not only show that CBN is curiously fighting self-kindled fires but also making fire-extinguishing monetary policy normalisation urgent. One, with reference to the SDF, it forms part of the MPR-in-corridor with an upper border standing lending facility (SLF) interest rate and a lower border standing deposit facility interest rate.

The MPR-in-corridor is a strange CBN contraption, which has hamstrung the economy. The MPR was introduced in December 2006. Following its brief suspension and later restoration, the SDF interest rate has ranged between 2.0 per cent and 10.0 per cent. Do DMBs even pay up to 10.0 per cent interest on fixed deposits by customers? Worse still, the remuneration of the SDF is made up of an unmerited fiat printed and inflation-causing subsidy that is doled out on loanable bank deposits, which prospective borrower businesses and individuals find unattractive owing to the high prime and maximum lending rates associated with the prevailing high MPR. Banks exist partly to lend to the economy including government when necessary. Therefore, high MPR-bred prime and maximum lending rates and not government borrowing, crowd out private sector access to bank loans. Consequently, with unchanged high MPR, some cash strapped real sector operators would still be unable to access the fund set aside for them under the 60 per cent loan to deposit ratio directive.

It is clearly unhelpful for CBN to reward DMBs with fiat printed SDF subsidy for any funds left unborrowed to the tune of N2 billion due to their MPR-based high cost. Instead, the MPR should leave the corridor and assume its much lower and proper level while the SLF and SDF interest rates should be abolished.

Note that there has been a vicious circle of poverty. Owing to prohibitive lending rates, the loan-thirsty real sector became under-productive and sired insufficient taxes. It remains so today. As a result, over time government was suborned to contract burdensome high-interest public debts whose steep service cost currently prevents public spending on priority infrastructure and critical socio-economic projects. Yet the IMF and CBN continue to push the Federal Government to take additional loans up to 60:40 ratio for domestic/external debts for the sole reason of avoiding the high interest cost of domestic loans without offering any insight into how to liquidate the borrowings. The implication is that high inflation with its accompaniment of high interest rates is cast in stone. That is unacceptable. 

Two, as regards the earmarked loanable funds, they form the balance of deposits held by DMBs after meeting the cash reserve and liquidity ratio requirements. Generally among most of the DMBs, the loanable deposits exceed the set bank lending limits. So DMBs would simply continue to transfer part of the deposits to borrowers without recourse to creating hot money. Hot money exerts inflationary pressure. In effect, the surplus deposits to loans profile is akin to government incurring ex-post surplus or balanced budget with little or zero inflation outcome. The begged question therefore is what brings about the persistent double-digit inflation, which in turn is responsible for the double digit MPR with accompanying high SLF and SDF interest rates?

We have constantly pointed to the causative factors which include (a) the withholding of Federation Account dollar allocations and their simultaneous replacement with pro rata bank deficit financing, a step which represents unbudgeted fiscal deficit; (b) SDF subsidy payments just noted above; (c) ultra vires CBN devaluations of the naira in contempt of the Appropriation Act exchange rate through various segment/window exchange rates; (d) apex bank usurpatory real sector development financing funds; and (e) double digit fiat printed interest subsidy payment on mopped excess liquidity through Open Market Operations (OMO) treasury bills. Issued treasury bills are restructured and they undergo metamorphosis to become FG revenue-draining national domestic debt. For example, in 2018, CBN fiat printed and released into the system N2.36 trillion to mop up N18.7 trillion excess liquidity arising from (a) above. Yet the system remained swamped with unwanted liquidity, which contributed at least 9.0 percentage points to the 2018 annual inflation rate of 11.4 per cent. At its recent meeting, the MPC seemed to have pretended to be unaware of the above factors by shifting the major causes of inflation to “pressure on prices, which continues to be associated with structural factors such as the high cost of electricity, transport and production inputs”.

It is imperative to remove the apex bank-induced economic burden outlined above to properly manage the economy. The distortional effects of the nonstandard CBN procedures would disappear when the country’s total public and private sector forex earnings are correctly transacted via a single forex market. The oft-repeated statement by the CBN governor that unification of the naira exchange rate via single forex market will cause inflation may not be logical, after all. On the contrary, because the Federal Government has consistently abided by the fiscal deficit ceiling of 3.0 per cent of GDP in implementing its budgets, the economy should ordinarily experience sub-3.0 per cent inflation. That development would give rise to a low and corridor-less MPR with resultant internationally competitive 3-6 per cent positive lending rates across-the-board.

At this stage, (i) investors would access cheap bank credit for various enterprises (which would be less prone to non-performance than those funded using high-cost loans) with attendant massive employment; (ii) government debt service cost would decline steeply; and (iii) the Nigeria-must-borrow mindset, which pushes for the naira-belittling plan of 60:40 ratio for domestic/external debts would fizzle out. That is because it would be unattractive to foist diverted Federation Account dollar funds on Federal Government if it should borrow at all to eat into Federal Government forex receipts under the aegis of Eurobonds whose international capital market interest rates would become expensive relative to normalised domestic interest rates.The upshot would be an economy growing at a very fast pace. And so the oddity whereby the CBN’s policy preferences over the years have constituted the main impediment to national economic advancement would have come to an end.


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