Minister  of Finance, Ngozi Okonjo Iweala

By Obinna Chima

A member of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) at the weekend said that the rationale behind the additional restrictive monetary policy measures adopted at their last meeting, resulting in a liquidity drain in the system last week, was not meant to starve the economy of funds.

Interbank rates rose to a two-year high last Wednesday, with the overnight lending rate soaring to 35 per cent before closing at 27 per cent on Friday, triggering concerns that lending rates will rise further and could hit 40 per cent.

The MPC member, who spoke to THISDAY on the condition of anonymity, said members of the committee took the hawkish stance because intelligence had shown that there were a lot of idle funds in the system.

According to the member, the committee adopted the aggressive monetary tightening stance to guard against a speculative attack on the naira.

Continuing, he explained that the tightening was also adopted to effectively mop up the anticipated release of Federation Account Allocation Committee (FAAC) funds to the three tiers of government and budgetary releases to the ministries, departments and agencies of the Federal Government.

The MPC, which has operational independence in the setting of interest rates in the country, had at its July meeting, raised the Cash Reserve Ratio (CRR) to 12 per cent from eight per cent.

The communiqué, at the end of the meeting, showed that while 10 members voted for an increase in the CRR, only one supported its retention.

Also, the committee reduced the foreign exchange Net Open Position limit (NOP) from three per cent to one per cent. This decision was unanimously supported by all the members.

But the MPC retained the Monetary Policy Rate (MPR) at 12 per cent with symmetric corridor of +/- 200 basis points.
The situation was worsened by a recent CBN policy that barred banks that borrow funds from the repurchase agreement (repo) window from participating in its regulated Wholesale Dutch Auction system (WDAS), which also contributed to the liquidity drain and was said to have forced commercial banks to trade their securities and foreign exchange at a loss to meet their obligations.

But the MPC member said: “There is a lot of speculative foreign exchange trading going on and if we don’t take such decisions and allow the naira to float, it may depreciate to over N200 to a dollar, and this could trigger imported inflation. There is also too much money in circulation, which we can hardly control.”

THISDAY further gathered that the MPC adopted the measure because of the anticipated release of more funds for the implementation of projects in the 2012 budget.

Reacting to the development, Managing Director/Chief Executive Officer, Keystone Bank Limited, Mr. Oti Ikomi, however, said that the liquidity position of the market would improve once FAAC funds hit the system.

“Clearly the decision by the MPC was not intended to push rates so high, that was not the whole idea. The monetary tightening was to stem the attack on the naira. But at the same time, there is an implicit goal of low inflation.

“So it is always a careful balancing act between making sure that there is not too much pressure on the naira and at the same time that interest rates don’t go too high.

“This is because if interest rates go too high, the ability of borrowers to access funds cheaply would be retarded,” the Keystone Bank boss explained.

But Emerging Markets Strategist, Standard Bank Plc, Mr. Samir Gadio, insisted that the action by the MPC was “clearly at odds with the global rate cycle since most emerging market central banks in Brazil, China, India, South Africa have shifted towards a more accommodative monetary stance in recent months in order to support domestic growth and offset sluggish world economic conditions”.