CRR Reduction: Only Marriage Between Monetary and Fiscal Can Save Economy

It is all about the economy. Financial institutions can hardly survive without a sound economy. The attempt by the Monetary Policy Committee (MPC) to mitigate the impact of the implementation of the Treasury Single Account (TSA) on banks is a good one. But at this time when major economic drivers seem to be conspiring against economic growth, there is greater need, more than before, for monetary and fiscal policy to work effectively together.
For instance, the resolve of the monetary authorities to shun devaluation of its currency must be matched with increased productivity. And productivity can only be achieved when funds are channeled into production.
Some believe the injection of between over N500 billion and almost N800 billion to the system after TSA sucked over N1.2 trillion is a welcome development, yet there are those that took it with a pinch of salt. But without doubt, it has filled some hole, leaving yet a handsome deficit of between N400 billion and N700 billion.
Analysts said the mover by the MPC has refreshed the market with between a little over N500 billion and nearly N800 billion.
The MPC, according to analysts at Afrinvest had to take the decision to tackle the issue slowing economic growth momentum after GDP growth slowed for the third consecutive quarter to 2.35 percent in the second quarter of 2015. The alarm raised by the central bank governor, Godwin Emefiele last week that the economy could go into recession is another clarion call for a closely knitted monetary and fiscal action.
The move by the committee is also to strengthen the weakened consumer spending power against the backdrop of the fiscal challenges faced by state governments in meeting salary obligations to civil servants.
Other considerations by the committee include the continuous slide in crude oil prices, and the urgency to fill the hole created by the implementation of the TSA, among others.
Afrinvest estimates that about N767.4 billion would have been injected into the system through the six percent reduction in Cash Reserve Ratio (CRR). According to it, monetary survey data from the CBN for the month of July 2015 indicated that approximately N4.4 trillion was held by the central bank reserves with mandatory components of N4.2 trillion. Analysts there projected that with the six percent cut in CRR, a net credit of N767.4 billion would have returned to the vaults of banks.
But FSDH Research believes that, with DMBs already debited based on the previous 31 percent CRR, a six percent reduction therefore amounts toN527 billion credit.
John Obot, a retired banker said what is required is that government gives the real sector a bailout instead of bailing out the state governments that have squandered revenue.
Obot argument is that, with the little succor the committee have provided, fiscal actions as boosting production within the private sector will go a long way in increasing production than bail out governors, some, whom will be out of power in months.
“Clearly, these are not issues monetary policy alone can address. It is expected that when President Muhammadu Buhari releases names of his minister, a robust fiscal solutions will be created to compliment monetary policy”, said Obot.
Analysts at FSDH Research said, “the decision taken to reduce Cash Reserve Ratio (CRR) is unlikely to have significant impact on economic growth as the major concerns, which include shrinking government and private expenditure following lower oil prices plaguing growth remain unchanged.
“Perhaps, the major impact that will accrue from last week’s development is an easing of the rate at which government borrows, because expectantly, most of the inflows will be channeled to the t-bills and fixed income space.
“Our view is that there has to be significant contribution on the fiscal front to address the current challenges facing Nigeria. The appointment of economic team and a clear economic agenda are needed to steer Nigeria from its current growth trajectory”, said analysts from FSDH Research.
FDSH based their projection on a different premise.
“Having fully commenced the TSA, it is clear that only the private sector, state and local governments (PSL) deposits with banks will be affected by the new CRR. We estimate, based on monthly data from the CBN, the total PSL Naira deposit with banks to be around N9 trillion as at September. With DMBs already debited based on the previous 31 percent CRR, a six percent reduction therefore amounts toN527 billion credit”.

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