CBN’s New Policies: Littering the Ground with Banana Peels?

The last two policies rolled out by the Central Bank of Nigeria (CBN) governor, Sanusi Lamido Sanusi have come as a shock to many discerning economist and manufacturers. The further increase in the Cash Reserve Ratio ((CRR) for public funds to 75 percent and the removal of the ceiling on how much dollars the Bureau De Change (BDCs) can buy from the Retail Dutch Auction System (RDAS) left many speechless.
Concerning the hike on CRR, analysts are wondering why the central bank chief will insist on strangling the economy.
Bismarck Rewane, Chief Executive Officer of Financial Derivatives Company said the decision to quarantine another 25 percent of public sector deposits is a kick in the groin of the banks. The magnitude of the shock is to take an additional N750 billion away from the system.
“We expect an immediate spike in interest rates of 400-500bps before it settles down to a 1.5 percent increase in the effective cost of funds to banks”, said Rewane.
The first time the Monetary Policy Committee (MPC increased the CRR on public sector deposits in August 2013, an estimate of N1trn or 6.84 percent of M2 was debited. This time, approximately N750 billion will be debited on February 4. This amount is equivalent to 5.09 percent of M2.
Observers of the development wondered how the quarantining of government’s N1.75 trillion will deprive government from spending. The central bank its main fear is the expected huge spending by government as elections beckons.
In most developed countries, interest rates are in the range of between two and at most six percent. But the CBN governor appears to be doing everything possible to ensure businesses in the country have little or no access to credit.
To many of the analysts, the action seems to be littering the ground with banana peels on the ground for the national economy.
The Lagos Chamber of Commerce and Industry, (LCCI) also warned the nation over the recent raise in the Cash Reserve Ratio, CRR, of public sector funds from 50 per cent to 75 per cent.
It said it would have a profound negative effect on the fragile economy as the increase would push up interest rates.
Remi Bello, LCCI President, said: “The recent review of Cash Reserve Ration (CRR) on public sector deposits with commercial banks from 50 per cent to 75per cent by the Central Bank of Nigeria, CBN, would have profound effect on interest rates, financial system stability, the real economy and financial inter-mediation.
He said current monetary policy regime is inadvertently reinforcing the import dependence of the economy while penalizing domestic production.
“It is becoming increasingly difficult to produce domestically due to a combination of structural and monetary factors. The incentive to import is increasing while the motivation for domestic production is diminishing. It is impossible to build an inclusive and job creating economy with this scenario.
“Nigeria has a strong public sector economy which is also reflected in the balance sheet of banks; the financial intermediation role of banks would be impeded as the economy is being deprived of the surplus resources from the public sector.
“Financial intermediation is a major function of banks in any economy which makes it possible for resources to be channeled from the surplus segment of the economy to the deficit sectors at any point in time”, he said.
Again, the central bank announced the removal limit on foreign exchange sold to BDCs at the Retail Dutch Auction System (RDAS).
Previously, BDCs were subjected to a limit of $250 million weekly.
But the central bank in a circular dated January 24, 2014, addressed to all authorised dealers and BDCs, a copy of which was posted on its website, explained that the policy was aimed at shoring up liquidity in the BDC segment of the foreign exchange market.
Analysts said the move will further depreciate the nation’s foreign reserves.
Their fear is that, as politicking gathers momentum, politicians will use the opportunity to ferry huge amount of money around in smaller, more compactable way.
“In fact, if care is not taken, all funny sorts of importation will simply resume”, said Akin Remi, an ex-banker.
Also, the say the move could encourage capital flight. In fact they believe it is another spreading of banana peels for the in-coming central bank governor.

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