Amidst warning by Central bank of Nigeria (CBN) that Nigeria could slip into economic recession in 2016, Fitch Ratings on Thursday has stated that cutting reserve requirements will not add liquidity to the Nigerian banking system because it releases no additional foreign currency (FC).
This is coming as financial experts in the country urged the Federal Government to come up with concrete development plans that would assist the nation to jump start the economy. Fitch said that substantial government-related FC deposits are exempted from reserve requirements and have already been withdrawn from the system after the government ordered all public-sector deposits to be moved from commercial banks into the centralised Treasury Single Account (TSA) earlier this month.
“Nigeria’s Monetary Policy Committee reduced mandatory reserve requirements on all local-currency (LC) deposits to 25 per cent from 31 per cent this week in the hope that this might ease liquidity pressure, stimulate new lending and boost economic growth. This should provide some additional LC liquidity into the banking system but around NGN1.3 trillion (USD6.5bn) of deposits were sucked out of the banks in September, reflecting transfers to the TSA”, the statement said.
Public-sector deposits traditionally account for around 10 per cent of total banking sector deposits. According to Fitch: “Lower reserve requirements will not offset the tighter FC liquidity at Nigeria’s banks as a currency split of public-sector deposits is not disclosed but in our opinion, FC deposits are substantial, held up by oil-related deposits.
“The centralising of public-sector and government-related FC deposits at the TSA has made it increasingly difficult for commercial banks to meet customer demand for FC. FC availability was already strained in 2015 due to falling oil revenues, central bank action to defend naira depreciation and heightened negative investor sentiment towards emerging markets”.
The Executive Secretary, Financial Markets Dealers Association, Mr Wale Abe, said that any concrete step(s) to be undertaken by government had to be implemented within six months. He added that the economy had not witnessed any development as result of the downward trend in oil prices at the global market.
He restated that low oil prices had also been responsible for low positive growth. Abe, an economist, said the low growth had affected the real sector, the engine of growth of the economy adding that the CBN’s monetary policies were just to ensure financial stability.
Another economist, Dr Ayo Teriba, corroborated the CBN’s pronouncement and urged the Federal Government to heed to the advice. According to him, it is a statement of fact which needed to be addressed on time. Mr. Muda Yusuf, Director-General, Lagos Chambers of Commerce and Industry (LCCI), also said there was uncertainty in the economic environment.
He said that the current foreign exchange policy was another factor that had caused confidence crisis which had made investors to move their funds from the economy. He, however stated that there is an improvement in power supply but there are still infrastructure challenges in the business environment.
The Monetary Policy Committee (MPC) on Tuesday, Sept. 21 reduced the Cash Reserve Requirements (CRR) of Deposit Money Banks (DMBs) from 31 per cent to 25 per cent. The decision followed the implementation of the Treasury Single Account (TSA) policy, leading to huge cash withdrawal from the banks to the CBN’s vaults.
This means that some 14 per cent of the CRR is freed from the banks for further investments into the economy and the reserve requirement or CRR is the minimum amount of money that banks must hold in reserve at the CBN, usually given as a percentage of customer deposits.
