CBN 's Liquidity Squeeze: Shadow chasing campaign or the needed policy for the moment

CBN’s Liquidity Squeeze: Shadow-chasing Campaign

Written by By Geoff Iyats


NOT once, not twice, not even four times did he lament the frustration. Mallam Sanusi Lamido Sanusi, governor of the Central Bank, has repeatedly admitted that the loose fiscal policy is the albatross of the tight monetary policy he has pursued in the past five years. Just last week, the Monetary Policy Committee (MPC) he chairs gave a hint, suggesting that the porous fiscal regime is at the heart of the country’s rising inflation and flagging naira.

  Still at the meeting, the committee was, again, trapped in its web, retaining the Monetary Policy Rate (MPR) at 12 per cent for the 10th consecutive times. The rate has remained unchanged since the last quarter of 2011. Worst still, the cash reserve ratio (CRR) on public sector funds held by banks was moved to 75 per cent, taking the aggressive sterilisation that started last year some steps further.

   In the face of continuous call for an economy-friendly monetary policy last year, the committee jacked up the ratio from 12 per cent to 50 per cent. The move was intended to clean up excess liquidity in circulation to scale down inflationary trend and strengthen the naira. But just six months down the line, it is clear to those outside the walls of the apex bank that the MPC’s decision clearly lost the targets. Just when economic agents think the credit market could get some liberation, the committee has further tightened the rope. Quite a number predicted that the tapering campaign would continue this year on account of expected increase in political spending but not many ever thought the reserve ratio of public sector deposit would be toyed with so soon again.  

   Nigerian economy, people have argued, has defiled market logics. Perhaps, that is one more reason the economic managers also need to adopt desperate measures. Otherwise, the same credit squeeze the Nigerian real sector is currently going through forced the Federal Reserve to launch massive quantitative easing that saw the United State’s economy receiving many billion of dollars in form of bailout packages in recent years. The efforts paid off in new jobs and increased purchasing power.

  Today, an already-stimulated US economy is still demanding one form of incentive or the other. And the government is paying attention to the minutest request. Even with the recent tightening, President Obama still explains and seeks support for new steps his economic team is taking to unlock blocked American economic keys. Like Obama would say, the ultimate is to “get people to work.” Understandably, the United States is not Nigeria.

  Eurozone countries, even though they have been skeptical about full-scale quantitative easing, have had romance with quasi-bailouts as options for boosting their economies. Still, argument for a large-scale asset purchase by the European Central Bank (ECB) is gaining some points lately. The emerging resolve is that there may not be more enduring solution than genuine quantitative easing; and it could happen.



There might have been more hype about eurozone crisis in the past years. But beyond the excruciating sovereign debts that are threatening to consume the region, who says Nigerian economy is doing any better? Does it create more jobs? Does it put more money in the pockets of average citizens? Is it expanding the traditional baselines of oil/gas, finance and telecommunication? Has it translated into more capacity utilisation of the real sector?

  For several years, Nigerian banks have learned to survive (or feast) on public sector patronage, leading to the death original idea of financial intermediation. Hence, when the CBN increased CRR on public sector bank deposits last year, it got a pat on the back for tasking the operators to ditch armchair banking and get into the field. But not many marketers have been dispatched to mills and shops to sell their brands and negotiate fresh businesses since that decision was taken.  

   On this, Director General of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, says there are still no incentives to bank the real sector, which many had hoped should benefit from the supposed harsh policy. He lists some structural deficiencies such as poor power output and absence of infrastructure, which he says will continue to serve as killers of real sector funding.

  Yusuf, whose chamber has been very critical of government’s anti-production policies, says the less than 25 per cent budgetary attention given to capital projects by the 2014 appropriation bill exposes the mischief against local manufacturing. He observes that any monetary effort that is not matched with equal fiscal measures will create more challenges.

  “It is worst when you approach the issues from one side. We need a well-designed holistic approach to save the situation. The monetary authority will end up worsening the situation if there is no commensurate effort from the fiscal angle.”

  Yusuf says the CBN’s tapering agenda will stall local investments, as the cost of funds will escalate when it is available. His believe the time has come for the government to free inflation to boost local production, a suggestion the CBN is averse to.

   The LCCI’s DG castigates the Central Bank for over concentrating efforts on naira stablisation and inflation control at the expense of the growth of local industries. The religious desire to curb inflation, he notices, is threatening the future of the economy, a source of worry to manufacturers who bear the brunt of rising cost of credits.  

  Executive Director/Chairman of the Society for Analytical Economics, Nigeria (SAEN), Dr Godwin Owoh, had agued that efforts to discouraged banks from relying on highly volatile public sector fund would only increase competition for the deposits. He noted that Nigerian bankers lack the initiative to create or design products that can sell outside government circle.

  Public fund is generally considered a volatile cash that banks are not supposed to rely on for intermediation purpose because the depositor can call them up without sufficient notice. Its popularity is root in official graft of the yesteryears. It was fashionable, at a point in history, for heads of ministries, department and agencies (MDAs) to put public funds meant for specific projects in interest-yielding accounts, even at the detriment of the purpose of the money.

  Owoh questioned the rationale behind storing public fund when government financial commitments in different parts of the country in form of unpaid contracts suffer. He noted that growth of public sector bank deposits is an aberration the government should, in the interest of the people, address.  

  In a recent interview with The Guardian, Henry Boyo, a foremost Nigerian economist, described the MPC’s as extremely traditional

  “If you put new people there, they will do the same thing; we have been changing CBN governors but that has not made any difference. MPC says the same thing every time. Its purpose is to create stable prices. It cannot suggest that MPR should come down because if it does, it means they agree that there is excess liquidity.

  “As long as CBN claims there is excess liquidity, MPC will continue to keep MPR at 12 per cent or above. We are caught in our own web. They know that it is necessary to bring down interest rates but they cannot say that because they don’t want to contradict themselves.”



Indeed, ordinary Nigerians do not see how the Sanusi crackdown on ability of banks to play with public sector fund should bother them. Oke Oyelade Adeola, says: “I think the problem facing the economy, and by extension the CBN, is a structural one. Government fiscal indiscipline has not complimented monetary policy, prompting the CBN to embrace monetary tightening policy as its tool. When CRR on public deposits was 12 per cent what percentage of banks credit was extended to the real sector and at what rate? They were simply using the same money to purchase government bonds, making huge profits.”

   But Ogunleye Oluwatayo perceives that the move is a ridiculous way of taming inflation. He wondered why a country whose production capacity and utilisation is is in shamble should continue to squeeze credit.

  “The fact is that CBN attempts to artificially keep a single-digit inflation in the face of rising cost of production and the strategy is quite laughable and counter productive. One expects that, in the reality of Nigeria current economic situation, CBN’s preoccupation should be pursuing an expansion in its balance sheet, thereby encouraging banks to channel credits to the real sector… CBN should, as a matter of urgency, see how to promote and encourage real sector lending rather than compounding the problems through its obsolete monetary policies.”

CBN Shocks the Market with CRR Increase of 25%

CBN Shocks the Market with CRR Increase of 25%
The monetary policy committee (MPC) met today in the midst of uncertainty and apprehension about the direction of interest rates, the value of the naira and the CBN Governor’s succession transition. The consensus amongst economists was that interest rates and the monetary policy stance would remain unchanged. However, the MPC in its communiqué did not fail to surprise the market with its decision to review its tightening of money supply.
What did the MPC Decide?
The MPC increased the controversial CRR on public sector deposits from 50 to 75%; a much- dreaded decision by the banking system. It left all other parameters including the MPR un- changed at 12% p.a, with an asymmetrical corridor of +/-200bps. The CRR on private sector deposit was retained at 12% and the liquidity ratio was unchanged at 30%.
Why did they take the Market by Surprise?
Governor Sanusi has never been one to shy away from contrarian moves or decisions to up- stage analysts. The concerns of the MPC were mainly:
Increasing divergence between the official and BDC exchange rates Creeping core inflation
Depletion of fiscal buffers and leakages
Declining foreign portfolio inflows
However, the global economic recovery and the likely impact of tapering in the US on invest- ment flows, shows some limited amount of vulnerability on the external sector of the Nigerian economy 

Impact of MPC Decision on Money Markets, Investors and Exchange Rates
Money Markets
The impact of this decision on money markets will be a shock effect in the short run and a re- turn to equilibrium rates within six weeks. The first time the MPC increased the CRR on public sector deposits in August 2013, an estimate of N1trn or 6.84% of M2 was debited. At that time, the impact was a spike in interbank rates of approximately 800bps to an average of 21%p.a. Also, it coincided with the failure of two discount houses which exacerbated the situation. Even- tually, the rates declined to pre CRR levels. This set the stage for another round of excess li- quidity. This time, approximately N750bn will be debited on February 4. This amount is equiva- lent to 5.09% of M2. Therefore, we expect an initial spike of approximately 400bps before set- tling to a 1.5% increase in the effective cost of funds for the banking system.
Banking net interest margins and profitability will be affected whilst their liquidity will remain unimpaired. The Fed and State Governments will face some difficulty in extracting commissions from bankers.
Exchange Rate Management
The key variable that drove this decision remains the protection of the value of the naira in the foreign exchange markets. The CBN Governor expressed some concerns about the declining trend in foreign portfolio flows. This in addition to the leakages and falling fiscal buffers made the CBN take a more aggressive position to defend the naira.
The divergence between the official and parallel markets had widened to N20 or 12% of the offi- cial exchange rate. The CBN is of the opinion that the Nigerian economy is more exchange rate than interest rate sensitive. Therefore a depreciating currency will have a direct impact on infla- tion and could be counterproductive.
Is the Naira Really Overvalued?
Our crude analysis using the PPP /Mac Donald index suggests that the true value of the naira has not changed dramatically since August 2013. Therefore, an 11% depreciation in the cur- rency in the parallel market in the last 2 months, is more out of fear and speculation than fun- damentals. The other indicator less used, is the result of dividing the total money supply by 
the aggregate foreign assets in the economy. This will give you a score of 340. If you then discount this with the annual dollar earnings, the outcome shows no difference between 2012 and 2013. All these suggest that the naira will most likely appreciate from N173 to N170 in the parallel market initially and diverge again if the external reserves deplete further in March. At the inter- bank and official markets, the naira will trade at current levels. The inverse relationship between interest rates and asset values may undermine the current stock market rally temporarily forc- ing a mini correction in the near term.

Source : FDC Research

Table 1: Is the Naira Really Over Valued
	Money Supply (M2)	External Reserves	M2/Ext. Res.
2012	N15.48trn	$44.18bn	350.49
2013	N14.74trn	$43.26bn	340.65

Sterilisation Continues to Hit Banks' Profit

Sterilisation Continues to Hit Banks’ Profits

CBN Governor, Sanusi Lamido Sanusi

• Regulatory actions blamed for dip in performance

By Steve Omanufeme

Nigerian banks, which in 2012 grew earnings at the fastest pace since the banking crises in 2009, saw profits dip in the third quarter of 2013 as lower interest rates and a slew of regulatory actions began to hit their bottom lines.

The Q3 profit trend is being projected by analysts to continue in the last quarter of 2013 which will imply reduced year-end profitability for the banks.

Nigeria's banks began to face a profit squeeze in the second half of 2013 as a result of new measures by the Central Bank of Nigeria (CBN) to help the country's economy, specifically aimed at making them lend more to domestic businesses and consumers.

One of such measures specifically raised the cash reserve requirement for banks holding government money to 50 per cent from 12 per cent, meaning they had to hold half of those deposits with the CBN.

Since the sterilisation of public sector funds, profits have dropped for most of the banks that have released results for the third quarter of 2013 and the trend is expected to continue into the fourth quarter.

“The directive by the central bank ... will continue to have a negative impact on banks’ ability to create earning assets,” said George Bodo, banking analyst at Ecobank, who expects fourth quarter bank earnings to decline by 10 per cent. Analysts further warned that profit growth by Nigerian banks would slow in the near term unless they grow their retail businesses, which remain largely untapped.

The CBN had in 2013 also directed deposit money banks to lower fees and commissions starting April 1 to minimize conflict with clients, which has had an impact on earnings.

Again, the rising interest rate environment and the ample liquidity banks enjoyed between 2011 and 2012, which helped to raise profits, was equally replaced by lower interest rates and a tighter monetary policy.

In the review period, average yields on Nigerian fixed income securities fell from as high as 18 per cent at the beginning of 2012 to an average of 14 per cent by the end of the second quarter of 2013. The CBN's sustenance of its benchmark interest at a record 12 per cent throughout 2013 meant the banks operated in a tight interest rate regime.

Most analysts saw the difficult times ahead for the banks when the cash reserve requirement ratio (CRR) for banks was raised from 4 per cent in 2011 to 12 per cent for private deposits and 50 per cent for public sector deposits in 2013, which led to a withdrawal of N950 billion of liquidity from the banking sector.

“We expect the introduction of a 50 per cent CRR on public sector funds to have a negative impact on the banking sector,” said Muyiwa Oni and Rele Adesina, analysts with SBG Securities, in a note released July 24.

“We forecast it could result in lost interest income of about N45 billion for the banking sector as a whole.”

Apart from Guaranty Trust Bank (GTB) and Stanbic IBTC, which saw marginal profit increases in the third quarter, most banks saw their profits dip.

Unlike its peers, Stanbic IBTC Holdings' nine-month profit before tax rose by 126 per cent to N20.33 billion, up from N8.740 billion in the same period last year.

The gross earnings at the Nigerian unit of South Africa’s Standard Bank rose to N83 billion during the nine months to September 30, as against the N64 billion achieved last year.

The bank's net interest income also increased to N27.094 billion, from N26.601 billion last year.

GTB also witnessed marginal growth, as profit grew by 7 per cent to N82 billion from N76.9 billion in 2012. Gross earnings grew by 9.3 per cent year-on-year (y/y), though quarter-on-quarter (q/q) it marked a 4.7 per cent decline from Q2 levels on a stand-alone basis.

Though gross income increased for First Bank of Nigeria Limited (FirstBank) from N213.8 billion in the corresponding period of 2012 to N239 billion, profit declined by 7.4 per cent from N75.7 billion to N70 billion in the third quarter of 2013.

For Access Bank, the unaudited results made available on the floor of the Nigerian Stock Exchange (NSE), showed its gross earnings stood at N154 billion at the end of September 2013.

It, however, showed the bank's profit before tax fell by 10.26 per cent to N35 billion as at September 2013, compared to the N39 billion in the comparable period of 2012.

The bank's operating income also declined by 7.96 per cent to N104 billion during the period under review, from N113 billion in September 2012. However, its operating income improved by four per cent from N34 billion in the second quarter, to N35 billion in the review period.

UBA Q3 results also showed a profit before tax decline by 14 per cent to N10.2 billion due to a 21 per cent reduction in non-interest income to N16.7 billion and an 11 per cent rise in operating expenses to N28.6 billion.

Meanwhile, Skye Bank Plc's gross earnings rose to N102 billion at the end of the period as against the N94 billion it realised in the corresponding period of 2012.

But its profit before tax also declined to N14.562 billion at the end of September 2013, from the N16.549 billion it realised in the comparable period of 2012.

FBN Holdings Third Quarter Profit Down by 8%

FBN Holdings Plc has released its third quarter results for 2013 with its profit after tax declining by eight per cent within the period

The results, made available to our correspondent by the company on Tuesday, were prepared using the audited nine-month accounts of the significant subsidiaries within FBN Holding and showed that the group’s profit after tax fell from N64.3bn in the third quarter of 2012 to N59.1bn in the period under review.

Its profit before tax also fell by seven per cent to N70.1bn in the period under review, from N75.7bn in the corresponding period of 2012.

However, gross earnings were up by 11 per cent, rising from N261bn to N290.8bn. Following the upward trend, the group’s shareholders’ funds rose by seven per cent to N441.7bn from N414.1bn, while its total assets jumped by 17 per cent to N3.651tn.

According to the bank; the total assets was up by eight per cent quarter-on-quarter, having stood at N3.4tn in June 2013, and 14.6 per cent year-to-date.

A statement by the bank quoted the Chief Executive Officer, Mr. Bello Maccido, as saying, “Over the first nine months of 2013, we began to see the impact of recent changes in regulatory policy on our business, in particular, the increase in the minimum savings deposit rates as well as the removal of the ATM withdrawal fee.”

Maccido explained that despite the significant regulatory headwinds, the performance of the group remained resilient, delivering year-on-year growth of 11 per cent in gross earnings to N290.8bn.

He added, “We continued to build our portfolio of businesses; expanding existing revenue streams, creating new lines of business such as mobile insurance and Bancassurance.”