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.”