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Nigeria’s new Central Bank governor Olayemi Cardoso has pitched his tent with achieving price stability over accelerating growth in Africa’s largest economy with a series of stealth tightening despite not officially raising rates since taking office in September.
“Liquidity in the entire banking sector has been significantly reduced to under N100 billion in November,” Cardoso said on Friday in a speech at the Chartered Institute of Bankers of Nigeria’s annual dinner in Lagos.
Tight money policies like regular Open Market Operations (OMO), Treasury Bill auctions and sustained Cash Reserve Requirement (CRR) debits, have helped to mop up excess liquidity from the banking system.
“These measures have already started to yield results, as excess liquidity in the banking system has significantly reduced and the Overnight Bank Borrowing (OBB) rate has increased to a level consistent with the monetary policy program,” Cardoso said.
The CRR is cash that lenders are statutorily required to keep with the central bank of Nigeria (CBN), even as some of these monies are needed to help bolster liquidity and support economic recovery.
For the first six months through June 2023, banks restricted deposits with the regulator surged to N11.44 trillion, which is 13.51 percent higher than in 2022 period, according to data gathered by MoneyCentral.
Economic growth has been anemic however, as Nigeria’s Gross Domestic Product (GDP) grew by a tepid 2.54% (year-on-year) in real terms in the third quarter (Q3) of 2023.
The problem now: Cardoso risks a no-win position if growth needed to lift millions of Nigerians out of poverty continues to be anemic, while expectations by banks and investors that the CBN eases it’s previous aggressive tightening campaign via CRR debits are dashed, with the central bank’s singular focus on price stability.
“It’s a measure originally meant to be used to provide a buffer for banks and prevent exuberance in lending as well as create a safety net for banks, in the event of extreme liquidity needs. Whilst the fore is the primary purpose of cash reserve ratio (CRR), the secondary rationale is to use it to control system liquidity,” Abiola Rasaq, economist and former head investor relations at United Bank for Africa (UBA) Plc, told MoneyCentral.
“However, the CBN has turned the CRR to a liquidity management tool, and it technically uses it to reduce the cost of managing FX, as the CBN believes that leaving the liquidity in the banking system would mean there is money to fuel demand for FX, which the CBN wants to prevent as it continues to suppress FX demand.”
At 32.50 percent, Nigeria’s cash reserve ratio is one of the highest in the world and analysts have called for a cut in order to release long-term liquidity which will allow banks to lend out more funds to drive consumer spending and business investment which stimulates economic growth.
Nigeria’s annual inflation rate rose to 27.33 per cent in October from 26.72 per cent in the previous month, the National Bureau of Statistics (NBS) said, highlighting the challenge to price stability that Cardoso faces.
The naira has also fallen below the psychologically important threshold of 1,000 per dollar on the parallel market.
An OMO auction was recently held with a stop rate of 17.5% for the one-year tenor, attracting oversubscription of N350 billion. Another round of OMO has been approved to further reduce excess liquidity, Cardoso said.
The CBN has removed the cap on the remunerable Standing Deposit Facility (SDF) to increase activity in the SDF window and offered N108.1 billion worth of Treasury Bills with three tenors to the investing public, which can help reduce liquidity in the banking system, since Cardoso became governor.
“We have inaugurated a new liquidity management committee within the Bank that meets daily at 8am to assess liquidity conditions and ensure optimal levels,” Cardoso said.
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