By Babajide Komolafe
FSDH Merchant Bank analysts have projected that the Central Bank of Nigeria, CBN, will tighten monetary policy in the fourth quarter of the year by increasing the Cash Reserve Requirements, CRR, of banks.
Head of Research, FSDH Merchant Bank, Mr. Ayo Akinwunmi disclosed this at a media presentation of the bank’s monthly economic, financial and market outlook for October.
He said that in addition to the increase in CRR, FSDH analysts expects the CBN to increase liquidity mop up, which may lead to rise in yields on treasury bills, FGN bonds and on the new commercial paper coming into the market.
He added that these will help prevent capital flight and encourage foreign portfolio investment into the country, which is critical to forestalling further decline in external reserves. He said: “We have additional election spending that will increase liquidity, we have minimum wage that is coming up
“If the liquidity that we are expecting from election spending hit the system, if the liquidity we are expecting from minimum wage hit the system, then the CBN will have no other option than to implement a policy in Q4’18. And what they may likely do is to increase the CRR because that reduces liquidity in the system immediately.”
Noting that the huge excess liquidity in the banking system is due to dearth of bankable assets for banks to finance, Akinwunmi said: “People say credit does not move to the real sector, to the real economy and we are talking about high liquidity.
“The banks are looking at what assets to finance, we do not see the very good quality asset, so we keep our liquidity with us by either buying treasury bills or we buy bonds, or cash is king because we don’t want to record high non performing loans. That is a major factor that is responsible for the high liquidity we have in the system. And the election spending may add to it.
“So if you now add that one to the fact that banks are not lending because the economy is fragile, and of course you saw what happened when we were in recession, and we are not far from recession again.”