By Babajide Komolafe

Consolidated Discount House Limited has predicted that the Central Bank of Nigeria would increase cash reserve requirement (CRR) on public sector deposit (PSD) to prevent further pressure on the exchange rate of the naira.

This prediction was contained in a report titled, “Inflation in July 2013 and Review of Fixed Income market.

The CRR is the portion of deposits banks are mandated to keep as cash, and hence cannot be lent to customers. The report among other things reviewed the impact of the recent hike in CRR on public sector deposit by the CBN to 50 per cent, as well as the implications of the increase in inflation rate to 8.7 per cent in July, announced by the National Bureau of Statistics (NBS) on Monday.

“We believe that even with the 50% cash reserve ratio (CRR) on public sector deposits, a policy aimed at increasing the scarcity of the naira, the local currency remains vulnerable. Government revenue still remains susceptible to output leakages which would affect the accretion to the Foreign Reserves.

“We believe the naira will still remain under pressure despite the scarcity of the currency. Output leakages leading to a shortfall in government revenues, increased demand for US dollars by importers building stock for the yuletide season and fuel imports will serve as pressure points for the naira.  But the CBN has demonstrated that it has options.

“We believe the 50per cent CRR on PSD is a stop-gap measure on the International Monetary Fund (IMF) prescribed Single Treasury Account (STA) – a tool for consolidating and managing governments’ cash resources, thus minimizing borrowing costs. If the pressure on the naira persists, we believe the CBN can increase the CRR on PSDs even to 100% which would ultimately mean it has achieved the objectives of the STA.”

Review the impact of the 50 per cent CRR policy of the CBN on the banking industry, the reported stated, “The 50% CRR on PSDs has started to yield expected results. Prior to the maintenance period of August 7th, the market was logically jittery, which reflected in the interbank market. Banks have reacted in typical expectations. Interest rates on deposits have been on the rise and the deposit wars reminiscent of the pre-2009 banking reforms have resurfaced. Even banks perceived as fairly liquid have hiked deposit rates by as much as 200 – 400 basis points to augment for the shortfall in deposits and also safeguard existing deposits from being prised away.

“In the medium term, expansionary spending by the government and the Asset Management Corporation of Nigeria (AMCON) bonds maturing in December will mean that the CBN will have to resort to Open Market Operation (OMO) once again if it abstains from increasing CRR. The last OMO auction was about a month ago. Trading activities in the government securities over the last month indicate that it is a market on bid.

“For now, we believe institutional investors especially Pension Funds are spoilt for choice. Treasury Bills are yielding close to 14% and money market rates are at similar levels. But overall we believe the buying interest in the market will lead to a compression of yields. Interest rates will also moderate as the liquidity position in the market normalizes. The uncertainty around the US Fed’s plans for QE indicates there are still headwinds in the horizon. On the local front, these bargains in the market will gradually taper off which is why institutional investors have to lock in now at these rates.”


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