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CBN is right in withdrawing N1trillion public sector funds – Professor Ekpo

By BusinessNews Staff on February 17, 2014

The new monetary policy by the Central Bank of Nigeria (CBN) increasing Cash Reserve Requirement (CRR) from 50 per cent to 75 per cent for the deposit banks has sparked a row in the financial sector. While some banks expressed the fear that the new policy could force them to retrench in order to cut their costs of operations, some financial experts said that the decision by the apex bank would check constant spike in the demand for dollars to reduce excess cash flows in the economy, even as the implementation of the policy could curtail excessive spending associated with election period.

The new CRR policy framework calls for the withdrawal of about N1 trillion public sector funds from deposit money. The CBN explained that increased in CRR became necessary to address the problem of excess liquidity in the banking industry and to encourage the banks to mobilise savings from traditional sources, other than the public sector funds. A memo from CBN dated September 5, 2013 when the CRR was increased from 12 to 50 percent with reference BSD/DIR/GEN/LAB/06/039, provided further guidance on the reporting requirements.

The Director General, West African Institute for Financial and Economic Management (WAIFEM), who is also a professor of economics, Akpan Ekpo, spoke on the new policy on CRR and performance of the economy in 2013.
The increase in CRR from 50 to 75 per cent and subsequent withdrawal of N1trillion public sector funds from deposit money for some financial analysts would reduce the money available to banks which could also have effect on interest rates in the country. What is your opinion on this?

The increase in the CRR by another 25 percent making it 75 per cent is an attempt by the apex bank to mop excess liquidity in the system as part of its mandate to fight inflation. As you are aware, private deposits are not affected. In the short and medium terms, the increase may result in an increase in the already too high lending rates and high lending rates may further discourage investment, which is a necessary ingredient for growth and development.

However, since inflation could also be triggered by persistent spending, the result would be a further reduction in the inflation rate. There is the need for caution because too low inflation rate may have negative implications on the economy as it would kill the profit motive of banks and other businesses.

We could see that while the CBN pushed the CRR from 50 per cent to 75 per cent, the liquidity ratio and CRR on private sector deposits are maintained at 30 per cent and 12 per cent. This development is not totally new but a follow up to the monetary policy decision made in August 2013, when the CBN raised the CRR from 12 percent to 50 percent.

Since then banks, continued to struggle to source for deposit from private sector and individuals, through increasing interest rate of savings accounts and other facilities. In the last quarter of 2013, the public sector deposits with banks fell about 2 per cent, which represented N3.99 trillion from September’s N4.06 trillion, stood at N4.02 trillion in November 30 last year.

What is the way out? Should the banks experience more challenges in trying to meet the current CRR stipulated by the apex bank?
The point is to strike a balance. The apex bank should be more concerned with reducing the lending rates by decreasing the Monetary Policy Rate (MPR) since inflation is now single-digit and would remain so in the foreseeable future. In the long-term, banks would adjust. The operators are always ahead of the regulator.

Today, lending rates are very high, even as the real sector is in comatose. Sometimes we see the efforts of some technocrats and policymakers trying to move the economy forward, but unfortunately, they are not guided by a working-class ideology needed to radically address the matter of poverty and hopelessness. At the minimum, a developmental state philosophy must drive growth and development in the country.

So, we need the visible hand of government to address important issues that are vital, to enhance tangible growth in the economy.

As an economics expert, how do you assess the economy in 2013?
In assessing the economy, performance must not be limited to economic issues only, but the entire gamut of social-political activities for the fiscal year. Going by such analysis, the growth of GDP for 2013 was about 7 per cent. The non-oil sector that grew by 7.8 per cent in the previous year, declined to 7.4 in 2013.

The manufacturing sector grew by 7 percent in 2013 and contributed only 4.2 per cent to the GDP. The agric sector experienced marginal growth of 5 per cent in 2013, compared to 4.5 per cent the sector recorded in 2012. The contribution of oil and gas stood at 13 per cent in 2012 and 2013 respectively. Building and construction grew by 15 per cent in the third quarter of 2013 in contrast to a growth rate of 12.5 per cent it had in early 2013. The sector contributed just 2 per cent to the GDP, which is quite insignificant given the important of this sector to the entire economy.

Looking at the economy generally, the macro-economic fundamentals appeared much better in second quarter of 2013. The inflation rate was single digit, which enabled consumers to buy more goods and services, when compared to the first half of 2012. Beyond that, the fiscal deficit was lower than the same period in 2012. The contribution of manufacturing to GDP is about 4 per cent, this was the same contribution half year of 2012, and the forecast is that it would remain the same by 2015.

In our case, the perceived satisfactory growth rate has not created jobs for the citizens, especially the youths, because unemployment rate is about 37 per cent for youths and is still rising by the day.

What areas do you think government performed well in 2013?
Aside from this, government must be commended for making great efforts in 2013 to un-bundle the power sector through privatisation of the Power Holding Company of Nigeria (PHCN) and subsequent handling over of assets to the private investors. This is quite significant because the previous administrations could not drive the process of privatising the power, which is crucial to economic growth and development.

We believe that government will put an appropriate regulatory framework in place to cushion the anticipated burden on consumers, especially the low income earners and poor segment of the economy.

Given the current situation of our labour market, how will you assess the economy in job creation?
The unemployment rate in 2013 was 24 per cent, which is very high. This rate is far from the benchmark of 5 per cent. Also, the output loss to the economy cannot be over emphasized, let alone the social consequences of unemployment. It is not surprising that the rate of poverty increased to 70 percent in the third quarter of 2013. If we collapse the inflation rate and unemployment with the poverty incidence, both the discomfort and misery indices increased in 2012 and 2013.

Government declared that the economy recorded increase in the influx of Foreign Director Investments (FDIs). What is your take on this?
Apparently, the economy attracted more FDIs last year compared to 2012, but portfolio investments dominated about 70 per cent of the FDIs. An economy grows rapidly and benefits when foreign investors build factories to create jobs for citizens, transfer technology and build capacity, because portfolio investments are volatile and not sustainable in the long-term.

What will you say are the economic implications of Nigeria’s debt to GDP ratio of 21.50?
For me, this is still within the threshold, meaning there is still space for borrowing. But the important thing is borrowing efficiently to invest in public goods and capital projects in order to grow the economy and improve the standard of living of the masses. If we borrow inefficiently, it simply means that government is committing the future generation into debt. Aside from foreign loans, government has the Sovereign Wealth Fund (SWF) and other options for loan.

What should government do in order to attract the huge informal to the formal sector to ensure holistic growth?
At present, the informal sector accounts for 40- 50 percent of the nation’s economy. It is clear that, there is a widening inequality in the system, as the rich are getting richer every day, while the poor are getting poorer. Only a few are growing because they are working hard to cope with the current economic situation in the country.

Analysing the states’ GDP is another way to hold state governments accountable, to ascertain if they are performing or not, and then couple with the social indices. This is quite imperative because the Federal Government keeps 50 percent of national revenue, while the states keep the rest, with nothing to show excerpt abandoned projects across the country.

What will you advise government to do in this regard?
For the economy to move forward there must be a very strong regulatory framework for all the sectors to be stabilised. We should not use false assumptions to measure the index of growth rate.

[Vanguard]

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