he Central Bank of Nigeria (CBN) Tuesday resolved to leave the Monetary Policy Rate otherwise known as Interest Rate unchanged at 12 per cent with symmetric corridor of +/-200 basis points.
CBN Governor, Sanusi Lamido Sanusi
But the apex bank decided to increase banks’ Cash Reserve Ratio (CRR) to 12 per cent from eight per cent and also reduced the Net foreign exchange Open Position (NOP) to 1.0 per cent from 3.0 per cent with immediate effect.
The MPR is the rate at which the apex bank lends to commercial banks while the CRR is a monetary tool used to either call up excess liquidity or release funds needed for the growth of the economy as situation demands. The increase means that banks would have less cash available at their disposal as money is drained out of circulation.
Addressing journalists after the two-day meeting of Monetary Policy Committee (MPC) in Abuja, CBN Governor, Mallam Sanusi Lamido Sanusi, said the hike in CRR was aimed at curbing structural excess liquidity in the banking system amidst high inflationary expectations.
He noted that the significant liquidity on the books of banks had not led to intermediation and lending to the real economy as banks continued to take advantage of high yields on government securities to direct credit away from the core private sector.
Sanusi said although broad money supply (M2) grew by 1.35 per cent in June 2012 over the level at end-December, 2011, translating to annualised 2.70 per cent growth, overall credit to the private sector increased by 3.60 per cent.
But credit to state and local governments grew by 14.23 per cent or 28.46 per cent.
On annualised basis, credit to core private sector grew by 3.2 per cent or 6.4 per cent when annualised.
He, however, maintained that the liquidity in banks’ vault had provided ammunition for speculative activity in the foreign exchange market with implications for inflationary expectation.
Sanusi said: “The reason for increasing the CRR was not primarily about redirecting lending. It is primarily about contribution to stability. At the moment if you looked at what happened a few weeks ago, we had a lot of pressure on the exchange rate and the only reason we were able to make the naira stable was because we tightened money and also increased the amount of supply from the reserves of dollars. We cannot continue to rent down reserves in order to have a stable exchange rate and in the event of the slowdown in Europe becoming very serious and hitting oil prices; what will happen is that we are going to have so much pressure on reserves: we may have to rapidly depreciate the local currency and that will feed into the existing inflationary lope. So the primary concern is our price stability concern which is the primary mandate of the central bank. And if we have very high inflationary expectations, we should take measures to address structural excess liquidity in the banking system and that is what the CRR increase is supposed to achieve.”
It also emerged Tuesday that the country’s Gross External Reserves had increased by $0.33 billion to $37.16 billion as at July 19, 2012 compared with its value of $36.83 billion as at the end of May.
Meanwhile, Sanusi, who read the communique No. 83 of the MPC, said inflationary concerns and the attendant impact of higher interest rates on
small businesses as well as the potential for higher non-performing loans on the books of banks had compelled the committee to retain the existing interest rate.
He said: “The MPC viewed that a lowering of the rates in the face of sustained slower growth of output and global growth prospects could further weaken the exchange rate and adversely affect reserves at a time when the country needs to build up buffers against external shocks. It also reiterated its view that the growth challenge is a result of poor record of implementation of structural reforms and the capital budget.”
Continuing, he said: “Second, to leave the MPR unchanged. This is against the background of upward trending inflation figures and the precarious picture painted by the six months inflation forecast of the Bank, revised upwards since the MPC meetings of May, 2012. Inflation is expected to average 12.0 per cent during the next six months with core and food inflation being much higher. The forecast is mainly due to the increase in electricity tariffs and the tariff on imported rice and wheat.”
On the global economic outlook, he said the slowdown in world economic activities would have serious implications for the Nigerian economy should there be a reduction in the demand for oil and consequent decline in oil revenues.
According to him, a reduction in foreign exchange earnings would impair the build-up of external reserves and consequently exert pressures on the exchange rate. This, he said, would result into increased budget deficit as government would be unable to realise its revenue projections as well as lead to increased public sector borrowing to finance expenditure outlays.
Sanusi, again, warned that is presently vulnerable to an imminent economic shock because it does not have buffers to contain it having depleted the excess crude account originally created to provide succour in difficult times.
He said: “The committee observed further that during 2008-2009 when oil prices declined sharply and the domestic currency came under intense pressure, the CBN was able to defend the Naira because the nation had buffers, having accumulated substantial foreign exchange reserves when oil prices were high, but that this time around that luxury does not exist, as the excess crude account has largely been depleted, and is still being depleted by the tiers of government.
“We already are dealing with structure problems, we are already dealing with issues on the fiscal side; we do not want to compound this matter by having a high rate of inflation. Now one of the major concerns we have is that if you look at what is happening in Europe, United States, China, India and Brazil, you cannot rule out the possibility of a decline in the price of oil and if you have an external shock to reserves and a major depreciation of the currency-that is going to feed into an already existing inflation…and that would be unacceptable. So it is actually better at this moment to tighten money supply, tighten liquidity in the banking system, try to build up those buffers and prepare ourselves for the storm that would definitely come.”
Sanusi said: “The Committee observed that monetary policy faces a difficult task in terms of delivering price stability. Domestic conditions indicate rising unemployment, poverty, declining growth and rising inflation. Consequently, the money and foreign exchange markets appeared to be operating at sub-optimal levels. It noted that with the weakened global outlook underpinned by the slowdown in economic activities in the US, and major emerging economies like Brazil, China and India, contraction in output in the Euro area along with the persisting debt crisis which is proving difficult to resolve, lower demand for crude oil and lower crude oil prices, coupled with the lower domestic output growth, build-up of inflationary pressures, slowdown in the accretion to external reserves and the attendant pressures on the exchange rate as well as possible shortfall in the projected revenue for 2012, the ominous signs for the domestic economy are evident.”
The CBN Governor added: “In this regard, therefore, monetary policy is faced with very difficult choices, as whatever policy action taken must be weighed against the possible trade-off(s) and implications for the wider economy.
The Committee further noted that the inflation environment remained uncertain with the possible pressures coming from the core component in the medium term. Domestic inflation has maintained its upward trend, and is expected to remain within that region over the six month forecast period. More so, the Committee observed that since its meeting in May 2012, growth prospects continued to be threatened by developments in Europe, China, India and the US, as well as the very slow progress in structural reforms and poor implementation of the capital budget for 2012.”
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