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LCCI faults CBN over rise in Cash Reserve Ratio

By BusinessNews Staff on January 28, 2014

The Lagos Chamber of Commerce and Industry, LCCI, yesterday, warned the nation over the recent raise in the Cash Reserve Ratio, CRR, of public sector funds from 50 per cent to 75 per cent.

It said it would have a profund negative effect on the fragile economy as the raise would push up interest rates.

A statement signed by Alhaji Remi Bello, LCCI President, said: “The recent review of Cash Reserve Ration (CRR) on public sector deposits with commercial banks from 50 per cent to 75per cent by the Central Bank of Nigeria, CBN, would have profound effect on interest rates, financial system stability, the real economy and financial inter-mediation.

“Current monetary policy regime is inadvertently reinforcing the import dependence of the economy while penalizing domestic production.

“It is becoming increasingly difficult to produce domestically due to a combination of structural and monetary factors. The incentive to import is increasing while the motivation for domestic production is diminishing. It is impossible to build an inclusive and job creating economy with this scenario.”

Short and long term implication

Outlining the short and long term implication of the policy on the domestic economy, the Chamber said: “The immediate implications of the new monetary policy stance are high cost of fund for businesses, as banks adjust their rates to accommodate the new monetary conditions; draw down on existing loan facilities may be put on hold as the banks struggle to meet statutory ratio requirements; shock to the banking system which may trigger financial system instability.

“Nigeria has a strong public sector economy which is also reflected in the balance sheet of banks; the financial intermediation role of banks would be impeded as the economy is being deprived of the surplus resources from the public sector.

“Financial intermediation is a major function of banks in any economy which makes it possible for resources to be channelled from the surplus segment of the economy to the deficit sectors at any point in time.

“It is important at this time for the CBN to maintain a balance between its pursuit of low inflation and exchange rate stability on one hand and the need to stimulate the economy on the other. This is crucial in the light of the worsening unemployment and poverty situation in the country.

“The limitation of monetary policy in fixing economic problems that are structural in origin should be recognised. The threshold of monetary policy tightening should, therefore, be defined to avoid unintended adverse consequences for the economy.

“In stabilizing exchange rate, demand and supply side issues should be addressed. The current approach is too dependent on demand management. The Federal Government should address current concerns over fiscal leakages, depletion of reserves and the running down of the Excess Crude Account.

Need for better coordination

“Greater attention should be given by fiscal and monetary authorities to the fixing of the structural problems of the economy, especially the high infrastructural deficit.

“Fiscal and monetary authorities should commit to improvement in infrastructure investment to boost productivity in the economy and enhance inclusiveness. There is a need for better coordination between monetary and fiscal policies.

“The widening gap between the official and parallel market exchange rates is detrimental to the economy because of the incentives it creates for round tripping and speculative activities in the foreign exchange market.

“Finally, we maintain that the current disturbing outlook for unemployment, poverty and inequality in the country calls for monetary stimulus rather than monetary tightening.”

The Central Bank of Nigeria, CBN, had last October withdrawn total of N1.2 trillion from banks in two months when it started the 50 per cent Cash Reserve Requirement, CRR, on public sector deposits.

Data from the Financial Market Dealers Association, FMDA, Economic report for last September, wo months after the policy was introduced, showed that the CBN withdrew N955 billion from banks as 50 per cent deposits from the public sector and N242.75 billion in September bringing to a total of N1.2 trillion.

[Vanguard]

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