Godwin I  Emefiele official portrait(10Nigeria is back to another round of tight monetary measures. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on March 22 increased the monetary policy rate (MPR) by 100 bases point from 11 per cent to 12 per cent and the cash reserve ratio (CRR) to 22.50 percent while the liquidity ratio was retained at 30 per cent.

The MPR is the anchor rate at which the CBN lends to Deposit Money Banks to boost liquidity in the banking system. The increase in the MPR would raise the cost of funds to the banking system from the apex bank. It would also increase the rate at which commercial banks lend to their customers. Its goal is to lower money supply to the economy.

Godwin Emefiele, governor of CBN explained after the monetary policy committee meeting that the decision was based on the concern that excess liquidity in the banking system was contributing to the current pressure in the foreign exchange market. “The Committee, in its assessment of relevant internal and external indices, came to the conclusion that the balance of risks is tilted against price stability. The MPC, therefore, voted to tighten the stance of monetary policy. The MPC voted to raise MPR by 100 basis points from 11 per cent to 12per cent; raise CRR by 250 basis points from 20 to 22.50 per cent,” Emefiele said.

The apex bank governor further argued that the increases in the MPR and the CRR were necessary to curb their negative impact on consumer prices that have seen inflation rate rise to 11.38 percent, the highest level in three years, above the CBN’s policy reference band of six per cent to nine per cent.

He lamented that previous efforts to reflate the economy failed to receive the required response from banks. For instance, funds freed by the CBN’s accommodative monetary policy since July 2015 by lowering CRR and MPR were unutilized by commercial banks to credit. Instead of more credit to the economy, there was more liquidity in the interbank market that was used to depress the Naira at the foreign exchange market. Now, it is the task of the CBN to bring about more effective means of providing unhindered flow of credit at low cost to the real sector.

“DMBs were to access these funds by submitting verifiable investment proposals in the real sector of the economy. The funds have not impacted the market because the CBN was still processing some of the proposals submitted by the DMBs. In the first episode of easing which resulted in injecting liquidity into the banking system, DMBs did not grant credit as envisaged,” Emefiele said.

He attributed the increase in non-performing loans in the banking system to the constraining factors in the economy that have made it more difficult for businesses to meet the debt obligations. Currently, the non-performing loans have grown to five per cent as against the three per cent recorded few months back. He said the committee would be meeting with the affected banks to discuss the type of loans that have been granted that led to the rising non-performing loans with a view to reducing it.

Another issue that was considered by the MPC was the $20 billion held in bank customers’ domiciliary account. The committee assured Nigerians that the account would never be converted into Naira accounts. “Yes there are customers that have $20 billion in domiciliary account and I want to use this opportunity to say that those funds are not idle contrary to what people believe. Those funds on the balance sheet are funding certain assets on the other side of the balance sheet”, he explained. According to him, the $20 billion is a liability on the balance sheet and so there is nothing like it being idle. “I need to reiterate the fact that there is no intention and there will never be that intention because it is not within our view to begin to start to convert people domiciliary account and I wish to say that this should be taken very seriously,” Emefiele added.

The CBN governor explained that what the apex monetary authority was doing is to make the market open and not further tightening it to the point that would create problem for the economy. He assured that the situation in the foreign exchange market will improve as the price of crude oil keeps bouncing back in the international market.

By Dike Onwuamaeze

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