CBN’s MPC Fears Upside Risk of Q1 Transition, Withdraws N657bn from Banks through CRR

The Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) after its first deliberation this year decided to withdraw N657 billion from banks’ vault by increasing the Cash Reserve Ratio (CRR) on public funds held by banks.
It said the decision taken arose from possible fears that the risks associated with the transition from the current central bank governor, Sanusi Lamido Sanusi after he made public that he will not run for a second term.
The MPC left the Monetary Policy Rate (MPR), Standing Deposit Facility (SDF), Standing Lending Facility (SLF) and the general CRR rates unchanged at 12 percent, 10 percent, 14 percent and 12 percent, respectively, at its 20/21 January meeting, in line with our expectations and market consensus.
It also indicated that a reduction in interest rates was unlikely before the next electoral cycle. The committee however said that the CRR on public sector funds was increased to 75 percent, from 50 percent.
This implies a mop-up of around NGN657 billion.
Overall, the CBN reiterated its commitment to exchange rate stability, but highlighted a number of key upside risks to US dollar/Nigerian naira, including the transition at the CBN in first quarter of 2014, the start of QE tapering in the US, as well as the marginal level of oil savings in Nigeria which weighs negatively on market confidence. Interestingly, the MPC voted five to three to raise the CRR on private sector funds.
The CBN has been less aggressive in its sterilisation efforts in recent months as evidenced by the abundant NGN liquidity in the system (over N700bn last week; about NN1.044 trillion today) which offset the impact of the initial introduction of a 50% CRR on public sector funds. This stance reflected the favourable performance of the exchange rate in Q4:13 which made further tightening in effective monetary policy less urgent at the time, but also the elevated cost associated with OMO operations.
“Thus the increase in the CRR on public sector deposits highlights the fungibility of liquidity management policies used by the CBN, since the current approach will allow to gradually end the vicious cycle of OMO issuance to mop up previous OMO bills while reducing the cost of sterilisation”, said Samir Gadio, analyst with Standard Bank Research, London.
The decision to raise the CRR on public sector funds also has a pre-emptive character in addressing a likely fiscal slippage later this year. Moreover, it allows the CBN to gradually achieve the liquidity management benefits of the proposed – but never fully implemented – single treasury account reform through the backdoor.
The central bank reiterated its commitment to exchange rate stability, adding that a potential devaluation would have negative consequences on the economy and inflation (which Gadio expects to remain in single digits in the first quarter of 2014).
“This would indeed lead to a pick-up in imported inflation and depress investment, even though Nigeria’s external competitiveness would most likely not improve since oil accounts for 95 percent of total exports and given persistent infrastructure bottlenecks”, he said.
While the Bureau De change (BDC) segment of the foreign exchange market is less relevant in terms of size compared to the Retail Dutch Auction System (RDAS) and interbank markets, the CBN expressed concerns about the widening gap between the parallel and official and interbank US dollar/Nigerian naira rates in recent weeks. It also called for measures to contain the higher move in the parallel exchange rate, including steps to curb money laundering activities in coming days.
He said, even though oil theft has partially impacted government revenue, this cannot explain the magnitude of the shortfall in oil receipts and the sustained depletion of fiscal savings, especially considering the robust oil price. Such dynamics point to potential systemic leakages in the oil sector. The balance of the ECA now stands at a mere $2.5 billion (less than one percent of GDP versus a fiscal savings-to-GDP ratio median of 65 percent among major oil producers) which will continue to make Nigeria vulnerable to oil boom and boost cycles.

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