CBN CRR hike and real sector impact

The 12-member Monetary Policy Committee (MPC), led by the Central Bank Governor, Sanusi Lamido Sanusi, recently left the key monetary policy rate (MPR) at a record high of 12 percent and also aimed at ‘easy money’ at the disposal of Nigerian banks by introducing a 50 percent Cash Reserve Ratio (CRR) on public sector deposits.

The higher CRR – which is the minimum balance that the banks are expected to keep with the apex bank – is a tightening measure intended to check excess liquidity in the banking industry and stem the crowding-out effect on private sector borrowing, as well as preempt potential increased government spending in the run-up to the 2015 elections.

The move is expected to drain N950 billion of extra liquidity from the banking system, money that may otherwise have gone to credit expansion to aid investment and job creation. This raises questions about the responsibility of the CBN in driving employment growth in Nigeria.

Arguably the CRR hike and other tightening measures in the past may have led to a roll back in credit expansion or higher cost of funds. Bismarck Rewane, economist and CEO of consulting firm Financial Derivatives Company (FDC), says the CBN action will lead to a reduction in loan availability, while loans may re-price upwards, making them more expensive.

Three-month Nigeria interbank offer rates (NIBOR) spiked 850 basis points to 21.50 percent on August 7, as the CBN began implementation of the new CRR policy. While the US Federal Reserve balances its price stability mandate with stimulating growth and employment, the CBNs role in employment generation is a little bit more unclear though.

Though Nigeria’s economic growth which slowed to 6.6 percent in 2012 from 7.4 percent a year earlier, may expand 6.8 percent this year, according to the National Bureau of statistics (NBS), yet unemployment is a big problem and most college graduates cannot find work. The unemployment rate increased to 23.9 percent in 2011, compared with 21.1 percent in 2010 and 19.7 percent in 2009.Youth unemployment may approach 50 percent, while 67 percent of the country’s 169 million people live below the poverty rate.

It is remarkable that Sanusi at the end of the last MPC meeting also warned that the CRR hike was just the beginning of such drastic measures and that the CBN may be forced in the near future to continuously increase the CRR across board to maintain tight liquidity conditions.

While we welcome the CBNs attempts to maintain price stability by raising the CRR, we do however sound a note of caution. It is generally accepted that any policy that threatens loan growth in an economy may also lead to reduced economic activity and expansion.

The level of financial leverage in the economy is already low as total credit to private sector at N15.6 trillion is just 34.3 percent of the 2012 nominal GDP of N45.4 trillion. The equivalent level for China is 187 percent and 70 percent for South Africa.

We therefore urge the CBN to closely watch the impact of its action and if necessary take the needed policy steps to guard against a liquidity crunch or sustained reduced loan growth.

We also urge the federal government to complete the power reform which has the potential to improve the competitiveness of the Nigerian economy and enhance output diversification, which would help to alleviate unemployment.