Strategic plan of the Federal Government of Nigeria to reduce rising inflation will lead to cash mop up of N5 trillion from the banking industry as the Central Bank of Nigeria, CBN trying to implement the hike in banks’ Cash Reserve Ratio, CRR to around 45 per cent.
The Cash Reserve Ratio which represents banks’ cash reserves for the purpose of meeting up with cash obligations on demand was lifted up from 32.5 percent to 45 percent in apparent bid to drastically reduce inflation.
It was also gathered that the CBN is now working with some foreign portfolio investors, FPIs, to address ongoing concerns over recent reforms introduced in the foreign exchange market including 400 basis points hike in the Monetary Policy Rate (MPR).
This strategic plan is one of the resolution of a virtual meeting, tagged Foreign Portfolio Investors Call, organised in collaboration with NGX Group, which was addressed by the CBN Governor, Mr. Olayemi Cardoso, Deputy Governor, Economic Policy, Mohammad Abdullahi, and moderated by the Group Managing Director/ CEO of NGX Group, Mr. Temi Popoola, amidst other attendees.
The CBN Deputy Governor Abdullahi said, while delivering his address at the meeting with FPIs in response to inquiries on the impact of hike on banking system liquidity, that the banking system has a shortfall of N5 trillion to meet the 45 per cent CRR.
He asserted further that the apex bank will not debit the banks N5 trillion at once, buttressed his claim that the apex bank will implement the new CRR in such a way that will not be disruptive to the industry.
Before the MPC decision, he opened up that the effective CRR for the industry will be close to 40 per cent. He added some banks have already met up with 45 per cent CRR while banks with shortfall will have build up their cash reserves.
Concerning excess liquidity, the estimated N5.0trillion which represented the outstanding system liquidity in excess of the initial CRR range is expected to impact the liquidity of many banks adversely.
The newskingdom gathered that the decision to tighten came against the backdrop of deanchored inflationary trend which rose to 29.9 percent yearon- year, the highest since return to democracy in 1999. But financial analysts project the inflation rate would remain elevated in the near-term amid persisting exchange rate pressure, rising energy cost, and sustained fiscal imbalances.
While justifying the huge jump in MPR and CRR, the CBN Governor, Yemi Cardoso, mentioned the disruptive impact of deficit financing to the Federal Government by Ways & Means, and also the direct intervention of the apex bank in the real sector which is estimated in excess of ¦ 10.0 trillion.
He also highlighted structural inefficiencies within the foreign exchange market, and the need to strongly work along with fiscal authorities to effectively manage non-money factors.
According to the Analysts’ recommendation over this development, analysts at Afrinvest West Africa, a Lagos based investment house, said: “We suggest that in addressing inefficiencies, the apex bank prioritises the use of policy to minimise distortions and should remain focused on improving supply rather than countering the symptoms of illiquidity”.
“In assessing impact on markets, we anticipate an immediate and strong bearish repricing of fixed-income yields especially on short-dated bills. “Furthermore, expectations of higher interest environment over the near-term coupled with liquidity squeeze amid costlier Standing Lending Facility (SLF) access should strengthen bearish sway”. Free entry, exit for FPIs Meanwhile, Cardoso assured the FPIs of free entry and exit from the forex market. He added that the focus of the apex bank is to ensure stability of the exchange rate and ensure reasonable price discovery. .
