Will MPC Create Liquidity to Fill The N1.2Trn Hole as it Meets Today? … Total Banks’ Deposit now N16.86 Trillion

The banks are still in shock. So much left their coffers in matter of weeks. A whopping N1.2 trillion. Some say it could even be more when the dust settles. None of the banks’ chief executives have been to say anything categorical.
But Central Bank of Nigeria (CBN) governor, Godwin Emefiele perceiving the fear in the minds of his former colleagues assured last week they have no need to fear.
In an interview last with the media, Emefiele said he was ready to inject liquidity if needed into the interbank market, which dried up last week following the directive to government departments to move their funds from commercial banks into a “Treasury Single Account” (TSA) at the central bank.
The policy is part of new President Muhammadu Buhari’s drive to fight corruption, but analysts say it could suck up as much as 10 percent of banking sector deposits, playing havoc with banks’ liquidity ratios.
With global oil prices tumbling, banks and companies are already struggling with the consequences of a dive in Nigeria’s energy revenues that has hit the naira currency and triggered flows of capital out of the country.
“It is very likely that the cash reserve ratio will be cut. This addresses the liquidity issues in the Nigerian banking system, especially after the Treasury Single Account was made,” said Razia Khan, Africa research head at Standard Chartered.
“However, for as long as Nigeria is adopting a fixed exchange rate regime, and trying to defend its currency, it does not make too much sense to cut the Monetary Policy Rate (MPR) just yet,” she said.
Analysts at the FSDH Group said the recent domestic and international economic and financial market developments provide strong arguments for the Monetary Policy Committee (MPC) to change its policy stance in order to increase the level of liquidity in the financial market to support credit growth in the economy.
 At the end of its July 2015 meeting, the MPC maintained the Monetary Policy Rate (MPR) and the Liquidity Ratio (LR) at 13 percent and 30 percent respectively, and maintained the Cash Reserve Requirement (CRR) on public and private sector deposits at 31 percent. 
FSDH however said, “looking at the trend analysis of the yield on the 1-year U.S. Treasury Bill and the 1-year Nigeria Treasury Bill (NTB), we observed that the premium between the yields on the two bills increased to 16.84 percent as at September 14, 2015 from 14.58 percent as at July 30, 2015. The current yields on the Nigerian fixed income instruments are higher both in relative and absolute terms, compared to its peers. This may further attract funds to the market”, it said.
But the implementation of the Treasury Single Account (TSA) has brought about liquidity tightness in the system, with about N1.2 trillion withdrawn from the banking system to the CBN. As at Half Year 2015, we estimated the total deposits of the Nigerian banks at N18.06 trillion. If N1.20 trillion, which represents the FGN deposit is withdrawn, the total private, state and local governments’ deposits would be N16.86 trillion. 
“Assuming that the total State Governments of Nigeria (SGN) and Local Governments (LG) deposits represent about 60 percent of the FGN deposits, N720 billion would be withdrawn if all the SGN and LG implement the TSA policy, bringing the total withdrawal to N1.92 trillion. The total private sector deposit that would be in the system is N16.14 trillion. 
“Following the full implementation of the TSA on all government deposits, we expect total credits of about N595.2 billion into the system via Cash Reserve Ratio (CRR) refund, made up of N372 billion from FGN deposit and N223.20 billion from the SGN and LG deposits. 
“The system liquidity would therefore be short by about N1.33 trillion compared with the pre-TSA implementation. Meanwhile, the system liquidity would be short by N828 billion if only FGN deposits are withdrawn. We expect credit creation to be adversely affected because of this policy if additional liquidity is not injected into the system, said analysts at FSDH.
With an appropriate policy response from the CBN, the shortage in the system liquidity can be managed. 
Analysts believe that the most cost effective policy response from the CBN is through the reduction in the CRR. A reduction in the CRR to 26.09 percent will completely neutralise the impact of the TSA implementation on the FGN Deposits, while a reduction of CRR to 22.79 percent will completely neutralise the impact of the implementation of TSA on all government deposits. Any reduction beyond that will inject more liquidity into the system than pre-TSA implementation.
Afrinvest Research    Also expects the MPC to create liquidity through the reduction in CRR. 
It expects the MPC members to hold the Monetary Policy Ratio (MPR) and the Liquidity Ratio (LR) at the current rate, while the implementation of the TSA is a compelling reason for the reduction of the harmonized CRR to about 20 percent in order to neutralize the impact of the withdrawal of FGN funds from the banks via the TSA implementation and inject additional liquidity to support create growth in the economy.
Nigerian bond yields are expected to fall next week on expectations that the central bank will cut the cash reserve requirements (CRR) at its meeting on Tuesday, leaving banks with more money to invest in fixed income assets.
“The market is bullish presently because everyone is expecting a reduction in CRR at the MPC meeting next week,” one dealer said, referring to the bank’s Monetary Policy Committee meeting.
Nigeria central bank now requires banks to keep 31 percent of both public and private sector deposits in a reserve account with the central bank.
The yield on benchmark 2024 paper was quoted at 15.34 percent from 16.02 percent last week. The yield on 2022 paper was 15.48 percent, down from 16.13 percent last week. The longest tenor paper 2034 was trading at 15.44 percent against 16.11 percent last week. 
Events in the international and local markets points in the direction of creating more liquidity also. According to the latest monthly oil market report for August 2015 of the Organization for Petroleum Exporting Countries (OPEC), the world economic growth is forecast at 3.1 percent and 3.4 percent for 2015 and 2016, respectively. The U.S. Gross Domestic Product (GDP) growth rate was revised up to 2.5 percent in 2015 from 2.4 percent previously. 
The report also noted that the slowing Chinese growth may negatively impact the major economies in the Euro-zone. Japan’s close trading ties with China also led to a downward revision of Japan’s 2015 GDP growth from 1.2 percent to 0.8 percent. 
China’s economy is forecast to grow at a slower pace of 6.8 percent in 2015 and 6.4 percent in 2016. India, on the other hand, constitutes an exception, as growth is forecast to rise in 2016 to 7.6 percent from 7.4 percent in 2015. 
Meanwhile, the Federal Open Market Committee (FOMC) of the U.S. Fed has kept the Fed Rate unchanged at 0-0.25 percent at its September 2015 meeting. The FOMC’s decision was hinged on the recent global economic and financial developments, which it said somewhat restrain economic activity and are likely to put further downward pressure on inflation in the U.S. in the near term. 
FSDH said, the weak global economic recovery and the negative impact on oil price is a major external shock, and this calls for a monetary policy action to boost credit growth to develop the non-oil sector of the Nigerian economy.

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