Cardoso Faces Growth vs Inflation Dilemma With World’s Highest Reserve Requirement

New Central Bank of Nigeria (CBN) governor Olayemi Michael Cardoso is facing a major dilemma regarding the amount of cash that lenders are statutorily required to keep with the 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 hit N11.44 trillion, which is 13.51 percent higher than in 2022, according to data gathered by MoneyCentral.

“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,” said Abiola Rasaq, economist and former head investor relations at United Bank for Africa (UBA) Plc.

“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. The alternative to CRR would have been for the CBN to issue more OMO bills which would come at a cost to the CBN. So sterilising funds through the CRR is a way of mopping liquidity at no cost to the CBN,” said Rasaq.

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.

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.

A central bank increases this portion of cash reserves when it aspires to limit the use of funds to be lent out or invested. On the other hand, it lowers the cash reserve ratio if it desires to encourage lending and investment in the market.

United Bank for Africa (UBA) Plc mandatory balance with the CBN stood at N1.63 trillion as at June 2023; Access Holdings, (N2.45 trillion); Zenith Bank, (N2.24 trillion); Guaranty Trust Holdings, (N1.22 trillion), and FBN Holdings Plc, (N1.75 trillion).

Further analysis shows UBA’s total cash make up 22.30 percent of total assets; Access Holdings, (10 percent); Zenith Bank, (17.30 percent); Guaranty Trust Holdings, (26.90 percent), and First Bank Holdings Plc, (14.32 percent).

In short, analysts say there is a need to lower funding costs for businesses as global geopolitical tensions and the removal of subsidies on Premium Motor Spirit (PMS) and the unification of exchange rate by the new administration have ballooned inflation and tipped more Nigerians into the dungeon of poverty.

Nigeria’s annual economic growth rate slowed to 2.51 percent in the second quarter, hurt by a fall in oil production amid a series of reforms by President Bola Tinubu to revive a battered economy.

The country’s inflation surged to 25.80 percent in the month of August 2023, 1.72 percent points higher than the 24.08 percent recorded in the previous month, according to a recent data from the bureau of statistics.

But some analysts are of the view that a higher CRR ratio is needed to help tame inflation that is waging war on Nigerians as well as help shore up the battered naira.

The naira has fallen to the psychologically important threshold of 1,000 per dollar on the parallel market from 970 just last week.

“If CBN fails to maintain its CRR policy, so much money will flow into the market and further depreciate the naira. Generally, the policy has not favoured banks because the fund is not yielding any interest and of no benefit to the productive sector,” said David Adnori, Vice President, Highcap Securities Limited.

“These are funds banks lend to the real sector to drive business activities, finance working capital of the productive sector and boost GDP but the CBN is holding it down.“It is not a good development for the nation’s economy in general. However, CBN has its reasons and releasing these funds might result in hyperinflation, which can damage the nation’s economy. It is like a double edge situation- if you don’t do it, the economy is damaged and if you do it, the economy also struggles, “said Adnori.