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Cash Reserve Requirement: CBN withdraws N1tn from banking system

By on August 9, 2013

The Central Bank of Nigeria on Wednesday began the implementation of its new 50 per cent Cash Reserve Requirement policy, which requires Deposit Money Banks to keep 50 per cent of all public sector funds with the central bank.

Consequently, the CBN withdrew an estimated N1tn from the banking system on Wednesday, forcing interbank lending rates to jump by seven percentage points from 12 per cent at close on Tuesday to 19 per cent on Wednesday, according to a Bloombergreport.

The CRR is the amount of cash that banks have to keep with the central bank and is used to drain out excessive money from the system.

Three weeks ago, the CBN had expressed concern over the excess liquidity in the balance sheets of the banks and imposed a 50 per cent Cash Reserves Requirement on all government deposits with commercial banks.

The CBN governor, Mr. Lamido Sanusi, had said the introduction of the 50 per cent CRR on public sector funds became imperative in order to further tighten liquidity owing to increased spending in preparation for the 2015 elections.

The CBN boss noted that about N1.3tn of public sector deposits was currently with commercial banks, adding that such huge funds posed a risk to the current liquidity condition.

The central bank said the 50 per cent CRR would tighten liquidity and supports the naira, after fixing August 7 as the commencement date for the new policy.

But the naira fell slightly against the dollar on Wednesday, closing at N160.10 on the interbank market, weaker than the N159.65 to the dollar it closed at on Tuesday, according to Bloomberg.

Dealers said this was because banks had already sold their dollar positions to meet the new requirement ahead of Wednesday, so the impact had already been priced in.

“The central bank finally debited our accounts today (Wednesday), draining the market of liquidity and the overnight rate went up to 19 per cent,” one dealer told Bloomberg.

Traders said many lenders had already sold down liquid assets and dollars to replenish their cash balances in preparation for the withdrawal.

“The market had priced the effect of the huge cash withdrawal since the announcement two weeks ago, while fresh dollar demand and lack of dollar flows are expected to push down the value of the naira next week,” another dealer said.

Analysts say Nigeria will need to attract back foreign inflows for the central bank’s move to have a sustained positive effect on the naira.

Efforts to defend the naira helped to shrink foreign reserves to $46.96bn by the end of July, from $48bn in June.

The CBN has spent billions of dollars of foreign reserves over the past two months on keeping the naira within its target corridor of plus or minus three per cent around 155 to the dollar.

The secured Open Buy back rose to 18 per cent from 11.5 per cent on Friday; six percentage points higher than the central bank’s benchmark interest rate.

Dealers expect interbank rates to rise further early next week after the market reopens from a two-day Muslim holiday, but should moderate toward the end of the week on the back of additional cash flows from matured treasury bills.

The spokesman for the CBN, Mr. Okoroafor Ugochukwu, could not be reached for comments.

However, financial analysts had disagreed with the CBN over the imposition of the 50 per cent CRR on all government deposits with the commercial banks.

According to the analysts, the application of the 50 per cent CRR will not guarantee reduced pressure on both the exchange rate and inflation rate as a result of increased government spending.

An analyst and a director at DLM Securities, Mr. Idowu Ogedengbe, who said the 50 per cent CRR was meant to reduce the banks’ assets, noted that the development might force banks to explore consumer and small and medium scale enterprises lending in order to retain their profitability.

He said the policy might be counterproductive and reduce banks’ profitability, adding that this might force banks to lay off workers due to reduced profitability.

 

 

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