Without the land border closure which fanned inflation, the Central Bank of Nigeria (CBN) may not have been inclined to tighten credit.
But the apex bank has had to do just that, as curtailing excess liquidity has become necessary in taming inflation which has been on the rise since a controversial land border closure triggered a jump in the price of food items.
“The CBN is only cleaning up the mess created by the government with their questionable fiscal policies,” a former deputy governor of the Central Bank with knowledge of the matter told BusinessDay.
“The inflationary pressures are mainly fiscally-induced and should not be addressed with monetary policies but what do you do as a central bank when there’s a risk to price stability,” the source said on condition of anonymity to speak freely.
The implication of fighting fiscal challenges with monetary tools is that it creates a distorted economy, according to five analysts polled in a BusinessDay survey.
In particular, the hike in CRR means the banks have less cash with which to lend and that may slow down the pace of their fast growing pay-day loan spree.
The CBN had to increase bank’s cash ratio for first time in four years at its maiden session of 2020, after raising the Cash Reserve Ratio (CRR) for banks by 500bps to 27.5 percent from 22.5 percent.
Although effective CRR has long been above 22.5 percent, the move to further raise it contradicts the apex bank’s push for lending to the real sector.
Based on the adverse effect a hike in CRR would have on the economy, analysts say the Central Bank may have picked a wrong tool in fighting higher inflation that is driven mainly by food prices but recognise the CBN’s hands may be tied.
Using a monetary tool to solve a challenge that can be largely addressed by fiscal policies hasn’t sat well with economists who say the higher inflation is supply-driven and is as a result of the border closure.
Since the decision to stop land border trade, inflation has headed north, jumping by 96 basis points to 11.98 percent in December, and breaking three months of consistent declines as food prices soared.
Food inflation rose to 14.67 percent from 11.17 percent before the border was closed, while core inflation rose from 8.68 percent to 9.33 percent.
Analysts argued that improvements in the production of domestic substitutes of previously imported food products and overall upgrade of infrastructure are likely to have a more direct impact on Nigerian inflation.
Given that the major drivers of inflationary pressures are structural/supply side, the CRR hike is unlikely to significantly mute domestic price pressures, analysts at Lagos-based investment bank, CardinalStone Partners, said in a January 27 note to clients.
The CBN’s decision to raise the CRR while leaving other parameters (MPR, liquidity ratio and asymmetric corridor) unchanged stemmed from the need to mop up excess liquidity in the system to contain inflationary pressures, after the financial regulator in October last year restricted non-bank foreign investors from investing in its short-term OMO bills.
The ban has made non-bank local investors including Pension Funds Administrators (PFAs) jostle for other instruments, a move that has crashed yields on one-year treasury bills to as low as 5 percent, based on FMDQ data.
There are also indications the higher CRR contradicts the CBN’s drive aimed at pushing funds to the real sector of the economy to boost growth and improve domestic production of goods and services.
To boost the growth of the economy, the CBN in the larger part of last year deployed several unorthodox policies in a bid to force banks to lend.
Some of such policies include mandating deposits money banks to lend at least 65 percent of what they collect as deposits.
This singular decision has made the cost of funds fall, as banks continue to lure customers with cheap funds in order not to fall victim of the CBN’s hammer.
By increasing the CRR, analysts fear a squeeze of banks’ liquidity which might reverse the falling cost of borrowed funds and oppose the CBN’s efforts in stimulating the flow of credit to the private sector.
The rise in CRR will result in further liquidity squeeze for banks, hindering their ability to create risky assets and in turn meeting the LDR of 65 percent stipulated by the apex bank, according to analysts at Lagos-based stockbroking firm, CSL Stockbrokers.
“With this development, we think funding costs may begin to trend higher as banks review their deposit rates to meet their liquidity needs,” CSL said.
