By Victor ‘Tunde Oso
The decision of the Monetary Policy Committee (MPC) of Central Bank of Nigeria (CBN) to raise the cash reserve ratio by 500 basis points to 27.5 per cent, from 22.5 per cent, while leaving all other policy parameters constant last Friday, has continued to generate different reactions from economists and financial sector analysts.
The CRR is used to determine the minimum deposit commercial banks must hold in reserves with the CBN rather than lend out. It influences funds available at the bank’s disposal to create loans.
CBN Governor, Godwin Emefiele had also said after the meeting that “Maintaining the monetary policy rate at its present level is essential for sustainable support to growth before any possible adjustment.”
Most analysts had predicted that the CBN would leave rates unchanged.
Razia Khan, Chief Economist for Africa and the Middle East at Standard Chartered Bank said the “Announcement is still a tightening of liquidity and near-term, we would expect market interest rates to adjust to this.”
Inflation stood at 11.98% in December, rising for the fourth straight month, worsened by Nigeria’s border closure in August to fight smuggling. The CBN said inflation was outside its band of 6% to 9% and that it wanted to curtail inflationary pressure.
Firing the first salvo, development economist, Odilim Enwegbara, who lambasted the pronouncement, said if you increase cash reserve ratio (CRR), you are automatically reducing liquidity availability. “By this action you are reducing the lending ratio to the real sector.”
According to Enwegbara, “this, I call the blind fighting of inflation, which is at a high cost to the real sector economy. Of course, liquidity crunch only compounds a country’s economic problems especially a country that is in need of promoting investment, jobs and prosperity that lifts millions of its citizens out of poverty. That is why as high cash reserve ratio puts more pressure on interest rates, it automatically pushes inflation up.”
“So, rather than achieving the main reason for mopping, which is to reduce inflation, high cost of borrowing increases inflation. This defeats the earlier monetary policy goal,” he said.
A former President, Association of National Accountants of Nigeria (ANAN), Dr. Samuel Nzekwe, said the increase in Cash Reserve Ratio (CRR), from 22.5 per cent to 27.5 per cent, would only reduce banks’ funds and make them have less to lend investors thereby reducing money in circulation.
The former ANAN boss stressed the need to combine Monetary and Fiscal Policies; as well as tackle insecurity to ensure a drastic reduction in inflation.
However, Mr. Ambrose Omordion, the Chief Operating Officer, InvestData Ltd., said rising inflation concern made the committee to vote for adjustment in CRR.
Omordion said that the decision was in order to curtail consumer price index that stood at 11.98 per cent in December.
He noted that the apex bank’s unconventional monetary policy targeted at economic stimulation was yielding the expected result apart from spike in inflation figure.
“Higher CRR will reduce money in the system and trigger assets repricing that may lead to slight upward adjustment in interest rate because of competition in the money market,” Omordion said.