To Stem Inflation, CBN Increases Cash Reserve Ratio By 5%

Godwin Emefiele
CBN Governor, Mr. Godwin Emefiele
  • Emefiele: Rise won’t impede credit flow to real sector

By James Emejo in Abuja 

The Central Bank of Nigeria (CBN) yesterday resolved to raise the Cash Reserve Ratio (CRR) of deposit money banks (DMBs) by 500 basis points to 27.5 per cent from the current 22.5 per cent, as a response to the growing threat of inflation to the economy. 

It also decided to leave the Monetary Policy Rate (MPR), otherwise known as interest rate, unchanged at 13.5 per cent as well as the Liquidity Ratio at 30 per cent. 

The CBN Governor, Mr. Godwin Emefiele said the increase was justified considering the magnitude of excess liquidity expected in the system following the anticipated effect of the Value Added Tax (VAT) which was recently increased by the federal government from 5 per cent to 7.5 per cent and which takes effect by February 2020.

He further expressed concern that the pending maturing security bills could all together add as much as N12 trillion to existing liquidity in the system.

Addressing journalists at the end of the two-day meeting of its Monetary Policy Committee (MPC), in Abuja, Emefiele, who read the committee’s communiqué, said the Committee by a decision of nine members, voted to alter the CRR by 500 basis points from 22.5 to 27.5 per cent, while leaving all other policy parameters constant, adding that two members voted to leave all parameters constant.

Explaining the motivation for CRR hike, he said the committee had expressed concern about rising inflation, which increased consecutively in the last four months as at December 2019 to 11.98 per cent and higher than its target range of 6-9 per cent.

According to him, the rising price level is attributable to a combination of structural and supply side factors, expansionary fiscal policy; and growth in money supply arising from rising liquidity surfeit in the industry due to changes in the Bank’s OMO policy. 

He said in furtherance of its primary mandate to maintain price and monetary stability and in view of the anticipated medium-term liquidity surfeit from maturing OMO bills held by local private and institutional investors, which would not be rolled over, the committee considered it prudent to raise the CRR to curtail liquidity surfeit in the banking system. 

Emefiele is confident that increasing the CRR at this time is fortuitous as “it will help address monetary-induced inflation while retaining the benefits from the Bank’s LDR policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards.” 

He noted that gross credit in the industry grew by N2 trillion between May 2019 and December 2019. 

He said: “The Committee further encouraged the management of the banks to be more vigorous in its drive to improve access to credit through its pursuit of the Loan-to-Deposit ratio policy as doing this would help, not only in creating job opportunities but also help in boosting output growth and in moderating prices.

“It is noteworthy that Gross credit in the industry grew by N2 trillion between May 2019 and December 2019; channeled primarily to the employment-stimulating sectors such as agriculture and manufacturing, in addition to increased lending to the retail and SME segments, which is expected to help boost domestic output growth in the short to medium term. 

“To retain the gains from credit expansion and current industry focus on lending, the Committee advised the Bank to sustain its LDR policy and in addition, continue to deploy its DCRR policy which directs new funding for Greenfield projects and expansion to critical sectors of the economy.”

The CBN boss also gave reasons for the committee’s resolve to retain the MPR at current rate stressing: “Although, tightening would limit the ability of DMBs to create money, ultimately leading to a reduction in money supply and curtail their credit creation capabilities, which would eventually lead to rising cost of credit and credit risk as DMBs re-price their risk assets, the MPC believes that the aggressive pursuit of the current Loan-to-Deposit ratio policy thrust would continue to help to catalyse credit growth and positively impact growth and prices.”

He said the MPC further prevailed on the federal government to gradually reduce reliance on oil receipts and focus on revenue diversification through reforms of the tax system as well as rationalise fiscal expenditure towards reducing the current excessively high cost of governance.

Emefiele, however, allayed concerns that its decision to raise CRR could constrain the ability of banks to further enhance credit flow to the real sector of the economy.

He said: “You will all recall that in January 2017, inflation peaked at 18.7 per cent and the monetary policy, realising that price and monetary feasibility remains its core mandate, certainly could not stay idle and allow inflation to continue to rise, particularly above 12 per cent where we think it is growth retarding.

“So, monetary policy took those decisions to be very aggressive through tightening and using all forms of monetary policy instruments available to the bank to drive down inflation.

“Luckily, we were able to do this from 18.72 per cent in January 2017 to about 11 per cent. For some period, inflation remained ticking downward at 11 per cent but suddenly from around August last year, we began to see an uptick in inflation again, ticking up to about 11.98 per cent, which is the rate that we saw it in December 2019.

“In reviewing inflation, monetary policy committee felt that because inflation was already getting to the level that it considers a threshold beyond which it becomes growth retarding, monetary policy felt compelled that we need to begin to look at what can be done to reverse the trend of this rising inflation and prices and hence,  the committee felt in its wisdom, realising that there’s a lot of liquidity in the market, particularly also coming from not only the fiscal that is also sending to fund the 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 individuals would not be allowed any longer.

“The committee felt that there would be a lot of liquidity in the market and there was a need for the Bank to do something to mop excess liquidity to a 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 felt, look, let’s adopt the blunt process of taking this liquidity out by increasing the CRR from 22.5 per cent to 27.5 per cent.”

Continuing, the CBN governor stressed that the committee further charged the apex bank to “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 all observed that as a result of the policy of loan deposit ratio, we have seen loans grow from N15.5 trillion June 2019 to N17.6 trillion in December 2019- that is a N2 trillion growth and in the course of reading the communique, I made it very clear the various sectors including manufacturing, agriculture, retail and all sectors that benefited from this initiative.

“So,  it’s like let’s keep doing what you’re 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, exchange rate pressures on the economy.

“The committee insists and believes it would not constrain lending the way we’ve already started seeing lending grow in the economy.”