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Futility of increasing CRR on government deposits

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By Les Leba

The Monetary Policy Committee (MPC), at its meeting last week, retained Central Bank’s benchmark interest rate at the industrially destabilising level of 12%, to avert the threat of inflation.

Furthermore, the MPC raised the Cash Reserve Requirement (CRR) for government deposits with banks from 50% to 75%, in order to control systemic surplus cash and suppress a discomforting price spiral.

The huge leap in public sector CRR from 12%, six months ago, was the result of CBN’s belated recognition of the folly of sustaining the monetary strategy, which enabled banks to profitably leverage on public sector deposits in their custody, to lend hundreds of billions of naira back to the same government every month, with double-digit interest rates.

This patently suicidal monetary strategy has, according to some reports, rapidly increased our domestic debt burden from N1tn to beyond N7tn, with close to N5tn as debt service charges in the last decade.

It is regrettable that even after Lamido Sanusi’s unforced confession of such monetary mismanagement, neither organised civil society nor Labour nor indeed, the legislature, as elected representatives of the people, raised an eyebrow at such enduring reckless misapplication of public funds.

In countries where public officers are accountable, there would be immediate demand for investigation to determine how such an antisocial system transcended the tenures of  Joseph Sanusi, Charles Soludo and the incumbent, Lamido Sanusi, as CBN Governors.

Certainly, these eminent gentlemen would never have condoned borrowing back their own personal ‘idle funds’ with double-digit interest rates for whatever reason.

Nonetheless, the recent increase of CRR for public deposits to 75% will ultimately be largely as ineffective as if CRR across the board remained at the existing level of 12% for private deposits.

Instructively, if public sector deposits remained stagnant in bank accounts, CBN’s attempt to reduce excess cash and ‘injurious’ credit expansion by the banks may be successful; however,  if the MDAs rapidly drew down the cash balances in their accounts and paid employees’ salaries, or contractors’ bills, the erstwhile sequestered public sector deposits automatically transit to private sector accounts, and will, expectedly, ultimately still instigate surplus cash in the hands of the banks, with the attendant threat of liquidity expansion, which could push inflation rate uncomfortably beyond tolerable limits.

Consequently, suggestions that government deposits should be domiciled directly with CBN may equally be untenable as the funds will ultimately end up in private sector accounts, when MDAs begin draw down their account with CBN.

Similarly, even a 100% cash reserve requirement for public funds would regrettably also neither reduce systemic surplus cash, and restrain inflation nor would it diminish government’s borrowing to fund contrived budget ghost deficits and to mop up unyielding systemic surplus cash.

Indeed, despite the increase of CRR for government deposits to 50% in July 2013, evidence suggests that CBN still mopped up well-over N200bn from the money market, while the DMO (read as Debt Creation Office) also borrowed billions more at over 10% interest from the money market.

It is worrisome that the hundreds of billions of naira loans for which CBN actually pays double-digit interest rates will never be put to productive or critical infrastructural enhancement, as they are simply warehoused from use, to reduce so-called excess liquidity from the system, and avoid a worsening scenario, where too much money chase increasingly fewer goods to push up inflation rate.

Incidentally, it is this belated recognition of gross folly in monetary management that spurred Lamido Sanusi and the MPC to adopt an equally foolish strategy to reduce the scourge of ever present surplus cash in our system, with increases in CRR for public deposits, when in fact, a flat rate increase of CRR to 25 or 30% for both private and public sector deposits would have been certainly easier to control, with less possibility of abuse and would also be more effective for reducing excess liquidity.

Nonetheless, a much more elementary and sensible approach to our monetary predicament would be to first identify the cause of continuously surplus cash in the system, and examine why such surplus cash exists, simultaneously with the inability and/or disinclination of the banks to lend to the real sector at lower interest rates, which induce industrial and entrepreneurial expansion with attendant increasing job opportunities?

Indeed, a layman could also ask “How can we complain of too much money, and yet we do not have enough money to build better schools and hospitals or even to repair our roads?”

In truth, CBN and MPC’s strident monetary policy propaganda may be seen as subterfuge to distract public attention from failure to bring about low cost of funds to stimulate real sector growth plus low inflation rate to preserve the purchasing value of otherwise relatively paltry incomes of workers

Nonetheless, the solution to our monetary predicament has been in public domain for over a decade, yet, our economic experts have inexplicably refused to recognize the ineffectiveness and oppressive folly of the existing monetary management practice.

Evidently, the unyielding burden of surplus cash is the product of CBN’s possibly “inadvertent” expansion of money supply, whenever it creates and substitutes fresh naira supply in place of dollar allocations for dollar revenue.

Thus, the more dollars we earn, the greater will be the threat of surplus naira, which, paradoxically, cannot be productively applied for infrastructural enhancement or for the reduction of our galloping debt burden.

However,  the adoption of dollar certificates for the payment of dollar revenue would not only save us from the unnecessary oppressive burden of excess liquidity, but it would, in fact, become totally unnecessary for government to borrow back its own idle, non-interest yielding funds, at ridiculously high interest rates, while simultaneously crowding out the real sector’s access to cheaper funds, and thereby stalling the creation of increasing job opportunities and real economic growth.

So long, therefore, as the CBN and MPC remain in denial of this reality, our economic strategy will remain incapable of instigating industrial and economic growth that will support improved social welfare of our people, with increasing employment opportunities.



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